-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GVqotesFz+0N5jLCw/wuAoaVs47CCZSpw5nmD+kEo17EnTBBFsS9xCCddFRrkfiS 1L8J4wK140sm80jN2VAkNA== 0000912057-96-025791.txt : 19980423 0000912057-96-025791.hdr.sgml : 19980423 ACCESSION NUMBER: 0000912057-96-025791 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961113 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CHOICES ENTERTAINMENT CORP CENTRAL INDEX KEY: 0000822935 STANDARD INDUSTRIAL CLASSIFICATION: 7841 IRS NUMBER: 521529536 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 000-17001 FILM NUMBER: 96660162 BUSINESS ADDRESS: STREET 1: 836 W TRENTON AVE CITY: MORRISVILLE STATE: PA ZIP: 19067 BUSINESS PHONE: 2154281000 MAIL ADDRESS: STREET 1: 836 W TRENTON AVE CITY: MORRISVILLE STATE: PA ZIP: 19067 FORMER COMPANY: FORMER CONFORMED NAME: DATAVEND INC DATE OF NAME CHANGE: 19900401 10QSB 1 10QSB U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ________________ FORM 10-QSB (Mark One) /X/ Quarterly report under Section 13 or 15 (d) of the Securities Exchange Act of 1934 For the quarterly period ended September 30, 1996 Transition report under Section 13 or 15 (d) of the Exchange Act For the transition period from _____________ to _____________ Commission file number 0-17001 Choices Entertainment Corporation ----------------------------------------------------------------- (Exact Name of Small Business Issuer as Specified in Its Charter) Delaware 52-1529536 - - - ------------------------------- ------------------------------------ (State or Other Jurisdiction of (I.R.S. Employer Identification No.) Incorporation or Organization) 836 W. Trenton Avenue, Morrisville, Pennsylvania 19067 - - - ------------------------------------------------ ---------- (Address of Principal Executive Offices) (Zip code) Issuer's Telephone Number, Including Area Code (215) 428-1000 --------------------------------------------------------------- (Former Name, Former Address and Former Fiscal Year, if Changed Since last Report) Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15 (d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes __X__ No ____ State the number of shares outstanding of the issuer's Common Stock, as of November 8, 1996: 22,004,395 Transitional Small Business Disclosure Format (check one): Yes ____ No __X__ Part I: FINANCIAL INFORMATION Item 1. Financial Statements CHOICES ENTERTAINMENT CORPORATION BALANCE SHEETS
September 30, 1996 December 31, 1995 ------------------ ----------------- (Unaudited) (Audited) ASSETS Current assets: Cash $66,942 $86,391 Accounts receivable 33,021 11,098 Merchandise inventories 168,907 138,149 Prepaid expenses 60,323 28,236 ----------- ------------ Total current assets 329,193 263,874 Videocassette rental inventory, net 742,110 778,728 Equipment, net (Note 2) 110,260 186,990 Intangible assets, net 176,813 189,443 Other deferred costs 40,245 69,621 Other assets 68,458 68,254 ----------- ------------- $1,467,079 $1,556,910 =========== ============= LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: Notes payable $176,161 $184,691 Accounts payable 688,392 422,582 Accrued merger and acquisition expenses 481,576 563,901 Accrued professional fees 211,711 186,243 Deferred revenue 34,387 Accrual for lease cancellation and litigation reserves 2,500 13,750 Accrued salaries 71,259 52,603 Other accrued expenses 258,350 147,007 ----------- ------------- Total current liabilities 1,924,336 1,570,077 Notes payable 680,000 680,000 ----------- ------------- Total Liabilities 2,604,336 2,250,777 ----------- ------------- Stockholders' deficit: Preferred stock, par value $.01 per share: Authorized 5,000 shares: 37.4 shares issued and outstanding in 1996 and 34 shares issued and outstanding in 1995 Common stock, par value $.01 per share: Authorized 50,000,000 shares: issued and outstanding 22,004,395 shares in 1996 and 1995 220,044 220,044 Additional paid-in-capital 20,519,203 20,485,203 Accumulated deficit (21,876,504) (21,399,114) ----------- ------------- Total stockholders' deficit (1,137,257) (693,867) ----------- ------------- $1,467,079 $1,556,910 =========== =============
See accompanying notes to financial statements. CHOICES ENTERTAINMENT CORPORATION STATEMENTS OF LOSS (Unaudited)
For the Three Months For the Nine Months Ended September 30, Ended September 30, -------------------- ------------------- 1996 1995 1996 1995 ---- ---- ---- ---- Revenues: Movie rentals $1,065,576 $1,030,926 $3,142,777 $2,956,259 Merchandise sales 239,058 171,842 734,472 613,672 ---------- ---------- ---------- ---------- 1,304,634 1,202,768 3,877,249 3,569,931 ---------- ---------- ---------- ---------- Operating costs and expenses: Cost of goods sold 206,973 185,063 660,536 615,113 Cost of movie rentals 59,701 605 59,701 8,315 Store payroll 250,179 261,719 744,928 799,728 Store rents 232,617 226,730 700,577 713,142 Other store operating expenses 121,047 122,320 356,266 343,765 Selling and administrative expenses 187,843 209,185 488,776 659,405 Professional and consulting expenses 78,150 55,175 230,257 169,465 Loss on disposal of videocassette rental inventory 73,441 28,466 193,145 108,178 Merger and acquisition expenses 270,180 1,648,995 Depreciation and amortization 280,656 134,047 883,156 742,158 ---------- ---------- ---------- ----------- 1,490,607 1,493,490 4,317,342 5,808,264 ---------- ---------- ---------- ----------- Other income (expenses): Gain on settlement of debt 395,640 Interest expense, net (9,591) (6,407) (37,297) (12,510) ---------- ---------- ---------- ----------- (9,591) (6,407) (37,297) 383,130 ---------- ---------- ---------- ----------- Net loss $(195,564) $(297,129) $(477,390) $(1,855,203) ========== ========== ========== =========== Net loss per share of common stock (Note 3) $(0.01) $(0.01) $(0.02) $(0.09) ========== ========== ========== ===========
See accompanying notes to financial statements. CHOICES ENTERTAINMENT CORPORATION STATEMENTOF STOCKHOLDERS' DEFICIT For the Nine Months Ended September 30, 1996 (Unaudited)
Preferred Common Stock Additional Stock --------------------- Paid-in Accumulated Shares Shares Amount Capital Deficit Total --------- ------ ------ ---------- ----------- ----- Balance at December 31, 1995 34.0 22,004,395 $220,044 $20,485,203 $(21,399,114) $(693,867) Issuance of preferred stock to preferred stock note holders in lieu of cash payment for interest due on notes (Note 4) 3.4 34,000 34,000 Net loss for the nine months ended September 30, 1996 (477,390) (477,390) ---- ------------ --------- ----------- ------------ ----------- 37.4 22,004,395 $220,044 $20,519,203 $(21,876,504) $(1,137,257) ==== ============ ========= =========== ============ ===========
See accompanying notes to financial statements. CHOICES ENTERTAINMENT CORPORATION STATEMENTS OF CASH FLOWS (Unaudited)
For the Nine Months Ended September 30, ------------------------- 1996 1995 ---- ---- Cash flows from operating activities: Net loss $(477,390) $(1,855,203) --------- ----------- Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 883,156 742,158 Gain on settlement of debt (395,640) Cost of rental films sold 326,222 237,068 Loss on disposal of rental films 193,145 108,178 Videocassette and inventory reserves 17,320 39,733 Amortization and write-off of other deferred costs, net 38,750 Change in assets and liabilities: (Increase) Decrease in accounts receivable (21,923) 842 (Increase) Decrease in merchandise inventories (30,758) 223,914 (Increase) in prepaid expenses (32,087) (25,922) Increase in other assets (204) (3,507) Increase (decrease) in accounts payable 265,810 (272,931) Increase in deferred revenue 34,387 Increase (decrease) in accrued merger and acquisition expenses (82,325) 570,560 Increase (decrease) in accrued professional fees 25,468 (374,497) Increase in accrued salaries 18,656 12,940 Decrease in accrual for lease cancellation and litigation reserves (11,250) (10,000) Increase (decrease) in other accrued expenses 145,344 (18,659) ----------- ----------- Total adjustments 1,730,961 872,987 ----------- ----------- Net cash provided by (used in) operating activities 1,253,571 (982,216) ----------- ----------- Cash flows from investing activities: Purchase of equipment, net (13,433) (76,662) Purchase of videocassette rental films (1,251,057) (984,108) ----------- ----------- Net cash used in investing activities (1,264,490) (1,060,770) ----------- ----------- Cash flows from financing activities: Proceeds from issuance of common stock 1,292,607 Proceeds from private offering of preferred stock, net 897,600 Repayment of notes payable (8,530) (152,801) ----------- ----------- Net cash provided by (used in) financing activities (8,530) 2,037,406 ----------- ----------- Net decrease in cash (19,449) (5,580) Cash at beginning of period 86,391 129,389 ----------- ---------- Cash at end of period $66,942 $123,809 =========== ========== Supplementary disclosure of cash flow information: Cash paid during the year for interest $10,055 $-0- =========== ==========
See accompanying notes to financial statements. CHOICES ENTERTAINMENT CORPORATION NOTES TO FINANCIAL STATEMENTS (Unaudited) Note 1 - Basis of Presentation And Significant Accounting Policies The financial information included herein for the nine-month periods ended September 30, 1996 and 1995 and as of September 30,1996 are unaudited. In addition, the financial information does not include all disclosures required under generally accepted accounting principles because certain note information has been omitted; however, such information reflects all adjustments which are, in the opinion of management, necessary for a fair statement of the results of the interim periods and such adjustments are of a normal recurring nature. The results of operations for the nine-month period ended September 30, 1996 are not necessarily indicative of the results to be expected for the full year. Note 2 - Equipment Equipment at September 30, 1996 is primarily comprised of furnishings, leaseholds, and computers related to the Company's retail stores. Note 3 - Loss Per Common Share Loss per common share for the nine-month period ended September 30, 1996 and 1995 was computed by dividing the net loss by the weighted average number of common shares outstanding during the period. Nine Months Ended September 30, ----------------- 1996 1995 ---- ---- Number of shares used in calculations 22,004,000 21,542,000 Note 4 - Liquidity The financial statements have been presented on the basis that the Company is a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has incurred net losses, aggregating $ 21,876,504 from inception through September 30, 1996, including a net loss of $477,390 for the nine months ended September 30, 1996. The Company is currently operating in a severely distressed financial condition. As of September 30, 1996, the Company had a net working capital deficiency of approximately $ 1,595,000. The Company is currently funding its business on a day-to-day basis from revenues generated from its nine store operations. Because of the timing of the payment of certain obligations and an increase in the amount of credit extended by its primary supplier of videocassettes, the Company has reported positive cash flow from operations for the nine-month period ended September 30, 1996. However, as the revenues from the Company's existing nine stores are insufficient to insure timely payment of its obligations, the Company is in immediate need of financing to fund its short-term working capital needs. As a result of its severely distressed financial condition, the Company elected to issue 3.4 shares of its Series C Preferred Stock to the holders of its 5% unsecured promissory notes, in payment of $34,000 of accrued interest due such noteholders in August 1996, in accordance with the terms of such notes. CHOICES ENTERTAINMENT CORPORATION NOTES TO FINANCIAL STATEMENTS (Unaudited) Note 4 - Liquidity (Continued) The Company is in default under the terms of three 10% promissory notes in the aggregate principal amount of $150,000 plus accrued interest. These notes are held by Carl Shaifer and Max Scheuerer, two members of the Shareholder Committee ( See Part II Item 1. Legal Proceedings). The aggregate principal amount owing by the Company on said promissory notes was reduced to $144,000 from $180,000 as a result of a $30,000 payment made by the Company, to Max Scheuerer, the holder of two such notes in the then total principal amount of $150,000. This payment was made following the filing of a lawsuit against the Company by Max Scheuerer in which a judgment was sought in the principal amount of $150,000 plus accrued interest of $15,548. The lawsuit was withdrawn following said $30,000 payment without prejudice to its being reinstated if the balance owing on said notes was not paid in full prior to March 15, 1996. Mr. Scheuerer filed a new lawsuit on September 18, 1996 ( see Part II Item 1. Legal Proceedings), seeking a judgment in the amount of $146,298, representing principal and interest owing to Mr. Scheuerer by the Company on said notes (plus future interest, costs and any other appropriate damages). Since that time, the Company has made payments to Mr. Scheuerer totaling $6,988.74. The Company has asserted that it has reached a settlement with Mr. Scheuerer extending payment over time of the amounts owed; however, if it is determined that no settlement has been reached, the Company is presently unable to satisfy the balance owing and there is no assurance that the Company will be able to satisfy a judgment in such amount against the Company. The entry and enforcement of such a judgment against the Company's assets would materially and adversely affect the Company's business. Additionally, the Company is in default under the terms of a 10% promissory note in the principal amount of $30,000, which note is held by Harold E. Hamburg, a member of the Shareholder Committee. The Company has paid all interest due to date on said note. The Company is also delinquent and presently unable to satisfy various other liabilities, including amounts owing to vendors and landlords, as well as substantial professional fees owing in connection with its now discontinued acquisition program and with respect to ongoing litigation. . As previously reported, a lawsuit was filed against the Company on April 9, 1996 in the Superior Court of California, entitled Gary N. Gibbs et al. v. Choices Entertainment Corporation et al., by certain individuals who allegedly purchased or purchased and sold securities of the Company. Also named as defendants in the lawsuit were the members of the Board of Directors, a former director and certain others. On July 12, 1996, Demurers to the Complaint filed on behalf of the Company and the other defendants were sustained. On July 29, 1996, a Second Amended Complaint was filed, in which plaintiffs seek monetary damages against the Company and the other defendants in the amount of $303,470, plus attorney's fees, costs of suit and such other relief as the court deems just. The plaintiffs are principally the same individuals who filed the prior Complaint, which contains substantially the same allegations as now set forth in the Second Amended Complaint. On August 28, 1996, the Company filed an answer to the complaint, denying plaintiffs allegations with regard to all claims. On October 22, 1996, the Company also filed for summary judgment. Discovery is proceeding. The Company does not believe that there is any merit to the lawsuit filed against it and intends to contest it vigorously. However, if the Company is unsuccessful in defending the lawsuit, the Company would not presently be able to satisfy an award of damages in the amount claimed, which judgment would, if enforced, materially and adversely affect the Company's business. Furthermore, even if the Company is successful in defending the aforementioned lawsuits, the cost alone in professional fees associated with these lawsuits, as well as other litigation ( See Part II Item 1. Legal Proceedings), could materially and adversely affect the Company's business. The Company's viability for the foreseeable future is and will continue to be dependent upon its ability to secure needed capital, to extend the due dates of liabilities, or to otherwise conclude or settle existing liabilities and claims on a satisfactory basis, and to successfully conclude the existing litigation. No assurance can be given that the Company will be successful in that regard. In the event the Company is not successful, the Company may be forced to seek protection under Chapter XI of the Federal Bankruptcy Laws. In such an event, the Company's CHOICES ENTERTAINMENT CORPORATION NOTES TO FINANCIAL STATEMENTS (Unaudited) Note 4 - Liquidity (Continued) ability to conduct its business could be severely hampered. Moreover, the value of the Company's equity would likely be greatly diminished, if not eliminated. Management believes that the Company will need to acquire or establish additional superstores in the future if the Company is to achieve the economies of scale necessary for it to become profitable. However, because of its severely distressed financial condition, the Company does not have the financial resources which would enable it to expand. The Company is also exploring the possibility of selling its video stores although no assurance can be given that it would be successful in that regard. In the event the Company is not successful in pursuing a possible merger or selling its video stores, it is likely that it will continue to operate through the nine stores currently owned which have historically provided insufficient revenues to enable the Company to operate profitably. Note 5 - Subsequent Events During October 1996, the Company expanded one of its superstores. Also during October, 1996 the Company closed two non-performing stores and opened one new superstore in November 1996. On November 8, 1996, the Company signed a non-binding letter of intent with West Coast Entertainment Corporation ("West Coast"), setting forth the basic terms of a possible sale by the Company of substantially all of its assets to West Coast for a combination of cash and common stock of West Coast. Consummation of a sale is contingent upon a number of conditions, the satisfaction of which cannot be assured. Such conditions include, among others, negotiation and execution of a definitive agreement, satisfactory due diligence by West Coast, obtaining all necessary consents and approval of the sale by the Company's stockholders. West Coast is one of the country's largest video specialty retailers. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following is Management's discussion and analysis of certain significant factors which have affected the Company's financial condition, changes in financial condition, and results of operations. The discussion also includes the Company's liquidity and capital resources at September 30, 1996 and later dated information, where practicable. FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES The Company is currently operating in a severely distressed financial condition. As of September 30, 1996, the Company had a net working capital deficiency of approximately $1,595,000. The Company is currently funding its business on a day-to-day basis from revenues generated from its nine store operations. Because of the timing of the payment of certain obligations and an increase in the amount of credit extended by its primary supplier of videocassettes, the Company has reported positive cash flow from operations for the three and nine-month periods ended September 30, 1996. However, as the revenues from the Company's existing nine stores are insufficient to insure timely payment of its obligations, the Company is in immediate need of financing to fund its short-term working capital needs. As a result of its severely distressed financial condition, the Company elected to issue 3.4 shares of its Series C Preferred Stock to the holders of its 5% unsecured promissory notes, in payment of $34,000 of accrued interest otherwise due such noteholders in August 1996, in accordance with the terms of such notes. The Company is in default under the terms of three 10% promissory notes in the aggregate principal amount of $150,000 plus accrued interest. These notes are held by Carl Shaifer and Max Scheuerer, two members of the Shareholder Committee ( See Part II Item 1. Legal Proceedings). The aggregate principal amount owing by the Company on said promissory notes was reduced to $144,000 from $180,000 as a result of a $30,000 payment made by the Company, to Max Scheuerer, the holder of two such notes in the then total principal amount of $150,000. This payment was made following the filing of a lawsuit against the Company by Max Scheuerer in which a judgment was sought in the principal amount of $150,000 plus accrued interest of $15,548. The lawsuit was withdrawn following said $30,000 payment without prejudice to its being reinstated if the balance owing on said notes was not paid in full prior to March 15, 1996. Mr. Scheuerer filed a new lawsuit on September 18, 1996 ( see Part II Item 1. Legal Proceedings), seeking a judgment in the amount of $146,298, representing principal and interest owing to Mr. Scheuerer by the Company on said notes (plus future interest, costs and any other appropriate damages). Since that time, the Company has made payments to Mr. Scheuerer totaling $6,988.74. The Company has asserted that it has reached a settlement with Mr. Scheuerer, extending payment over time of the amount owed; however, if it is determined that no settlement has been reached, the Company is presently unable to satisfy the balance owing and there is no assurance that the Company will be able to satisfy a judgment in such amount against the Company. The entry and enforcement of such a judgment against the Company's assets would materially and adversely affect the Company's business. Additionally, the Company is in default under the terms of a 10% promissory note in the principal amount of $30,000, which note is held by Harold E. Hamburg, a member of the Shareholder Committee. The Company has paid all interest due to date on said note. The Company is also delinquent and presently unable to satisfy various other liabilities, including amounts owing to vendors and landlords, as well as substantial professional fees owing in connection with its now discontinued acquisition program and with respect to on-going litigation (see Part II Item 1. Legal Proceedings). As previously reported, on April 9, 1996, a lawsuit was filed against the Company in the Superior Court of California, by certain individuals who allegedly purchased or purchased and sold securities of the Company. Also named as defendants in the lawsuit were the members of the Board of Directors, a former director and certain others. On July 12, 1996, Demurers to the Complaint filed on behalf of the Company and the other defendants were sustained. On July 29, 1996, a Second Amended Complaint was filed, in which plaintiffs seek monetary damages against the Company and the other defendants in the amount of $303,470, plus attorney's fees, costs of suit and such other relief as the court deems just. The plaintiffs are principally the same individuals who filed the prior Complaint, which contains substantially the same allegations as now set forth in the Second Amended Complaint. On August 28, 1996, the Company filed an answer to the complaint, denying plaintiffs allegations with regard to all claims. On October 22, 1996, the Company also filed for summary judgment. Discovery is proceeding. The Company does not believe that there is any merit to the lawsuit filed against it and intends to contest it vigorously. However, if the Company is unsuccessful in defending the lawsuit, the Company would not presently be able to satisfy an award of damages in the amount claimed, which judgment would, if enforced, materially and adversely affect the Company's business. Furthermore, even if the Company is successful in defending the lawsuits, the cost alone in professional fees associated with these lawsuits, as well as other litigation (See Part II Item 1. Legal Proceedings), could materially and adversely affect the Company's business. The Company's viability for the foreseeable future is and will continue to be dependent upon its ability to secure needed capital, to extend the due dates of liabilities, or to otherwise conclude or settle existing liabilities and claims on a satisfactory basis, and to successfully conclude existing litigation. No assurance can be given that the Company will be successful in that regard. In the event the Company is not successful, the Company may be forced to seek protection under Chapter XI of the Federal Bankruptcy Laws. In such an event, the Company's ability to conduct its business could be severely hampered. Moreover, the value of the Company's equity would likely be greatly diminished, if not eliminated. Management believes that the Company will need to acquire or establish additional superstores in the future if the Company is to achieve the economies of scale necessary for it to become profitable. However, because of its severely distressed financial condition, the Company does not have the financial resources which would enable it to expand. The Company is also exploring the possibility of selling its video stores although no assurance can be given that it would be successful in that regard. In the event the Company is not successful in pursuing a potential merger or selling its video stores, it is likely that it will continue to operate through the nine stores currently owned which have historically provided insufficient revenues to enable the Company to operate profitably. On November 8, 1996, the Company signed a non-binding letter of intent with West Coast Entertainment Corporation ("West Coast"), setting forth the basic terms of a possible sale by the Company of substantially all of its assets to West Coast for a combination of cash and common stock of West Coast. Consummation of a sale is contingent upon a number of conditions, the satisfaction of which cannot be assured. Such conditions include, among others, negotiation and excecution of a definitive agreement, satisfactory due diligence by West Coast, obtaining all necessary consents and approval of the sale by the Company's stockholders. West Coast is one of the country's largest video specialty retailers. The statements contained in this Quarterly Report on Form 10-QSB which are not historical facts contain forward looking information with respect to plans, future events or future performance of the Company, the occurrence of which involve certain risks and uncertainties that could cause the Company's actual results to differ materially from those expected by the Company, including but not limited to the risk of adverse litigation, the inability to make timely payment to vendors, landlords and other creditors, the risk of being unable to finance videocassette inventory acquisitions due to its severely distressed financial condition, and uncertainties detailed in the Company's filings with the Securities and Exchange Commission. CAPITAL EXPENDITURES During the nine-month period ended September 30, 1996, the Company's capital expenditures, relating to the purchase of videocassette rental films and furniture and fixtures, were approximately $1,251,000 and $13,400, respectively, compared to $928,000 for the purchase of videocassette rental films and $77,000 for the purchase of furniture and fixtures during the same period in 1995. The Company does not anticipate a significant increase in capital expenditures for the remainder of the current year other than the replenishment of videocassette rental films during the normal course of business. MATERIAL CHANGES IN FINANCIAL CONDITION Assets: Total assets decreased by approximately $90,000 between December 31, 1995 and September 30, 1996, primarily due to the amortization of intangible assets and other deferred costs which more than offset the increases in assets, such as inventory and prepaid expenses. Liabilities: Total liabilities increased by approximately $354,000 between December 31, 1995 and September 30, 1996, primarily due to the increases in accrued expenses and accounts payable in connection with obtaining a higher credit line with the Company's major videocassette supplier and to the timing of payment of certain obligations. Stockholders' Deficit: Between December 31, 1995 and September 30, 1996, the increase in stockholders' deficit was due to the loss of approximately $477,000 for the nine-month period ended September 30, 1996. MATERIAL CHANGES IN RESULTS OF OPERATIONS Rental revenues increased approximately $35,000 and $187,000, or 3% and 6%, during the comparative three-month and nine-month periods ended September 30, 1996, respectively. The increases are primarily related to higher availability of rental product, due to increased purchases of videocassette rental films, and to more favorable rental-weather conditions during the 1996 periods. Merchandise sales increased approximately $67,000 and $121,000, or 39% and 20%, during the comparative three-month and nine-month periods ended September 30, 1996, respectively. The increases are primarily related to increased purchases of merchandise movies for sale, and to the sale of previously viewed movies and other items. Included in merchandise sales during the nine-month period ended September 30, 1995 was approximately $89,000 in revenue from music products no longer sold in 1996. Cost of goods sold increased approximately $22,000, but decreased approximately 21% as percentage of merchandise revenue during the three-month comparative period, and increased approximately $45,000, but decreased by approximately 10% as a percentage of merchandise revenue, during the nine-month comparative period. The percentage decreases during both periods is primarily related to higher margins on rental films sold during 1996 when compared to 1995. Also included in merchandise revenue during the nine-month period ended 1996 is approximately $24,000 of customer membership revenue which has no corresponding cost of sales. Cost of movie rentals increased approximately $59,000 and $51,000, respectively during the three-month and nine-month comparative periods primarily due to the increased usage of a pay per transaction arrangement with a supplier of videocassette rental films. Store payroll decreased approximately $12,000 and $55,000, respectively during the three-month and nine-month comparative period . The decreases are primarily related to there being only 10 stores in operation during 1996 compared to 11 stores in operation during the 1995 comparative periods, and to the Company's continuing efforts to reduce operating costs in its superstores. Store rents increased approximately $6,000 and decreased approximately $13,000,respectively during the three and nine-month comparative periods. Other store operating expenses decreased approximately $1,300 and increased approximately $13,000 during the three-month and nine-month comparative periods, respectively. but remained relatively constant as a percentage of revenue during both periods. Selling and administrative expenses decreased approximately $21,000, or 10% and $171,000, or 26% during the 1996 comparative periods primarily due to the Company's continuing efforts to reduce overhead costs. Professional and consulting fee expenses increased approximately $23,000 and $61,000 during the 1996 comparative periods primarily due to costs associated with certain litigation (See Part II Item 1. Legal Proceedings). Merger and acquisition expenses decreased approximately $270,000 and $1,649,000 during the 1996 comparative periods due primarily to the termination of the Company's previously reported acquisition program during September 1995. Loss on disposal of videocassette rental inventory increased approximately $45,000 and $85,000, or approximately 2% of revenue during the 1996 comparative periods primarily due to the increase in the number of videocassette rental films sold at less than carrying value during 1996 to provide additional cash flow for operations. The gain on settlement of debt of approximately $396,000 during the nine-month comparative period ended 1995 was primarily attributable to the discounted cash settlement of approximately $1,006,000 of debt. Interest expense increased approximately $3,000 and $25,000 during the 1996 comparative periods primarily due to the interest expense relating to the increase in notes payable outstanding at September 30, 1996 when compared to the same period in 1995. As a result of the foregoing, the Company incurred a net loss of approximately $196,000 and $477,000 during the three-month and nine-month periods ended September 30, 1996, respectively. PART II - OTHER INFORMATION Item 1. Legal Proceedings As previously reported on Form 8-K, dated July 26, 1996, the Company filed a lawsuit on that date, in the United States District Court for the District of Columbia (the "Washington Proceedings"), entitled Choices Entertainment Corporation v. Carl Shaifer et al., seeking declaratory and injunctive relief against the following group of shareholders: Carl Shaifer, Joseph DeSaye, Max Scheuerer, Maureen and Lawrence Feeney, William and Evelyn Goatley, P.L. Anderson, Jr. , Harold E. Hamburg, David F. Beckman, Mark and Barbara Raifman and Frank Harvey (collectively, the "Shareholder Committee") for alleged violations of the federal securities laws. The Shareholder Committee had previously filed a Solicitation Statement ( the "Solicitation Statement") with the Securities and Exchange Commission on June 28, 1996, in connection with the Shareholder Committee's solicitation of written consents from other shareholders for the purpose of removing and replacing the Board of Directors of the Company without the holding of a meeting. The Company believes that the Solicitation Statement contains material misleading statements and omissions of material facts, including the failure to disclose serious conflicts of interests of the Shareholder Committee and of certain of its director nominees to the Board, that the Shareholder Committee has failed to file a Schedule 13D in accordance with the requirements of the federal securities laws, and that any consents obtained by the Shareholder Committee have been obtained in violation of such laws and are invalid. Additionally, as previously reported, on July 29, 1996, the Shareholder Committee delivered written consents to the Company, which the Shareholder Committee asserted were sufficient to remove and replace the Company's present Board of Directors with the nominees of the Shareholder Committee without the holding of a meeting, and such nominees attempted to assert control and to terminate the employment of existing management. The Company did not recognize the action purported to have been taken by the Shareholder Committee, having concluded that the Shareholder Committee had not delivered sufficient consents to remove and replace the Company's present Board and, in any event, that such consents were otherwise invalid as having been obtained in violation of the federal securities laws. As previously reported on Form 10-QSB for the quarter ended June 30, 1996, on August 2, 1996, a lawsuit was filed in the Court of Common Pleas of Bucks County, Pennsylvania, against the existing Directors of the Company by the director nominees to the Board of the Shareholder Committee, Carl Shaifer, Joseph DeSaye and Max Scheuerer, as well as on behalf of the Company, entitled Choices Entertainment Corporation et al., v. Ronald W. Martignoni et al., No. 96005737-18-5. The lawsuit requested that the Court grant a preliminary injunction requiring that the defendants cease acting as corporate officers or directors and otherwise relinquish control of the Company. On August 9, 1996, the lawsuit was discontinued by plaintiffs. As previously reported on Form 8-K, dated August 16, 1996, on that date, the Shareholder Committee's nominees, Carl Shaifer, Joseph DeSaye and Max Scheuerer, filed a lawsuit in the Delaware Court of Chancery for New Castle County (the "Delaware Proceedings"), C.A. No. 15170, entitled Carl Shaifer, et al. v. Ronald W. Martignoni, et al., against the Company and the existing Board of Directors, seeking: (i) a declaration that the present Board had been duly and validly removed and that plaintiffs were validly elected as the Company's Board, (ii) an order directing the holding of an annual meeting of shareholders on a date, to be fixed by the Court, not more than 30 days from August 16, 1996 (the date of the filing of the complaint), (iii) costs and expenses, including attorneys fees, and (iv) such other relief as the Court deems just and proper. Also as previously reported, on September 4, 1996, after two summary hearings, and prior to the filing of an answer by defendants in the Delaware Proceedings, the Delaware Court of Chancery, without ruling on the merits, ordered, inter alia: (i) that the annual ,meeting of shareholders be held on December 20, 1996, as previously announced by the Company, (ii) that the present Board, consisting of Ronald W. Martignoni, John A. Boylan and Fred E. Portner, shall constitute the Company's Board of Directors, until the earlier of the election of directors at the meeting or the resolution of plaintiffs claim in the lawsuit, and that Joseph DeSaye, except with respect to certain matters, be permitted to attend Board meetings, and (iii) that, until the earlier of the election of directors at the meeting or the resolution of plaintiffs claim in the lawsuit, the Company will not issue any voting securities in certain specified transactions except upon Court order and that the Company will not, except upon five business days notice, take any "action out of the ordinary course, " as defined in the order. The order also provides that the restrictions contained therein may be waived by written agreement of the parties and that the order may be modified by the Court. On September 6, 1996, defendants filed an answer to the complaint in the Delaware Proceedings, denying plaintiffs allegations with regard to all claims. Additionally as previously reported, on September 12, 1996, counsel for the Company and the Shareholder Committee notified the Court in the Washington Proceedings that they were engaged in settlement discussions and requested postponement of the hearing previously scheduled for September 13, 1996, which postponement was granted. As previously reported on Form 8-K, dated September 18, 1996, on that date a lawsuit was filed against the Company in the Court of Common Pleas of Bucks County, Pennsylvania, captioned Max Scheuerer v. Choices Entertainment Corporation, Civil Action No. 96006871, in which plaintiff, a member of the Shareholder Committee, is seeking a judgment in the amount of $146,298 (plus future interest, costs and any other appropriate damages), which amount allegedly represents $120,000 of principal and $26,298.35 of interest owed by the Company to plaintiff under two 10% promissory notes, on which plaintiff has alleged that the Company is presently in default. The Company was served with the complaint on September 27, 1996. The aforesaid principal amount was reduced to $120,000 from $150,000 as a result of a $30,000 payment made by the Company on November 30, 1995, in response to a previous lawsuit filed by plaintiff seeking collection of said notes. In connection with such payment, plaintiff discontinued the previous lawsuit without prejudice and agreed not to reinstate it for any remaining balance owing on the notes prior to March 15, 1996. Since that time, the Company has made payments to plaintiffs totaling $6,988.74. The Company has filed an answer asserting that it has reached a settlement with plaintiff extending payment over time of the amount owed. As previously reported on Form 8-K, dated April 17, 1996, a lawsuit was filed against the Company on April 9, 1996 in the Superior Court of California, entitled Gary N. Gibbs et al. v. Choices Entertainment Corporation et al., by certain individuals who allegedly purchased or purchased and sold securities of the Company. Also named as defendants in the lawsuit were the members of the Board of Directors, a former director and certain others. On July 12, 1996, Demurers to the Complaint filed on behalf of the Company and the other defendants were sustained. On July 29, 1996, a Second Amended Complaint was filed, in which plaintiffs seek monetary damages against the Company and the other defendants in the amount of $303,470, plus attorney's fees, costs of suit and such other relief as the court deems just. The plaintiffs are principally the same individuals who filed the prior Complaint, which contains substantially the same allegations as now set forth in the Second Amended Complaint. On August 28, 1996, the Company filed an answer to the complaint, denying plaintiffs allegations with regard to all claims. On October 22, 1996 the Company also filed a motion for summary judgment. Discovery is proceeding. The Company does not believe that there is any merit to the lawsuit filed against it and intends to contest it vigorously. Item 3. Defaults Upon Senior Securities. The Company is in default under the terms of three 10% promissory notes in the aggregate principal amount of $150,000 plus accrued interest. These notes are held by Carl Shaifer and Max Scheuerer, two members of the Shareholder Committee ( See Part II Item 1. Legal Proceedings). The aggregate principal amount owing by the Company on said promissory notes was reduced to $144,000 from $180,000 as a result of a $30,000 payment made by the Company, to Max Scheuerer, the holder of two such notes in the then total principal amount of $150,000. This payment was made following the filing of a lawsuit against the Company by Max Scheuerer in which a judgment was sought in the principal amount of $150,000 plus accrued interest of $15,548. The lawsuit was withdrawn following said $30,000 payment without prejudice to its being reinstated if the balance owing on said notes was not paid in full prior to March 15, 1996. Mr. Scheuerer filed a new lawsuit on September 18, 1996 ( see Part II Item 1. Legal Proceedings), seeking a judgment in the amount of $146,298, representing principal and interest owing to Mr. Scheuerer by the Company on said notes (plus future interest, costs and any other appropriate damages). Since that time, the Company has made payments to Mr. Scheuerer totaling $6,988.74. Additionally, the Company is in default under the terms of a 10% promissory note in the principal amount of $30,000, which note is held by Harold E. Hamburg, a member of the Shareholder Committee. The Company has paid all interest due to date on said note. Item 5. Other Information. On November 8, 1996, the Company signed a non-binding letter of intent with West Coast Entertainment Corporation ("West Coast"), setting forth the basic terms of a possible sale by the Company of sub substantially all of its assets to West Coast for a combination of cash and common stock of West Coast. Consummation of a sale is contingent upon a number of conditions, the satisfaction of which cannot be assured. Such conditions include, among others, negotiation and execution of a definitive agreement, satisfactory due diligence by West Coast, obtaining all necessary consents and approval of the sale by the Company's stockholders. West Coast is one of the country's largest video specialty retailers. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits The exhibits listed in the Index to Exhibits appearing on Page E-1 are included as part of this report. (b) Reports on Form 8-K The Company filed a Form 8-K dated August 16, 1996. Such report included disclosure under Item 5 of a lawsuit filed against the Company and its Board of Directors. SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CHOICES ENTERTAINMENT CORPORATION Date: November 12, 1996 By: /s/ Ronald W. Martignoni --------------------------- Ronald W. Martignoni Chief Executive Officer Date: November 12, 1996 By: /s/ Lorraine E. Cannon ------------------------ Lorraine E. Cannon Chief Financial Officer INDEX TO EXHIBITS Exhibit No. Description of Exhibit 3 (a) Certificate of Incorporation, as amended (1) (b) Certificate of Designations of Series C Preferred Stock, as amended (2) (c) By-Laws, as amended (3) 4 (a) Form of Certificate Evidencing Shares of Common Stock (4) (b) Form of 5% Promissory Note (2) 10(a) Severance Agreement between Registrant and John A. Boylan (5) 10(b) Consulting Agreement between Registrant and John A. Boylan (5) 27(a) Financial Data Schedule (5) 99(a) Letter of Intent between Registrant and West Coast Entertainment Corporation (5) (1) Filed as an Exhibit to Registrant's Registration Statement on Form S-8 (File No. 33-87016) and incorporated herein by reference. (2) Filed as an Exhibit to Registrant's Quarterly Report on Form 10-QSB, for the quarter ended September 30,1995 and incorporated herein by reference. (3) Filed as an Exhibit to Registrant's 1992 Annual Report on Form 10-K and incorporated herein by reference. (4) Filed as an Exhibit to Registrant's Registration Statement on Form S-1, inclusive of Post-Effective Amendment No.1 thereto (File No.: 33-198983) and incorporated herein by reference. (5) Filed herewith. E-1 EX-10.A 2 EX-10.A Exhibit 10(a) SEVERANCE AGREEMENT This Severance Agreement (this "Agreement"), effective August 15, 1996, confirms and memorializes the agreement reached and entered into on that date between John A. Boylan ("Boylan") and Choices Entertainment Corporation (the "Corporation") (Boylan and the Corporation are sometimes collectively referred to herein as the "Parties"). RECITALS WHEREAS, Boylan is presently employed by the Corporation and is a director and Chairman of the Board of the Corporation; and WHEREAS, Boylan and the Corporation are parties to a letter agreement dated March 31, 1992, as amended by letter agreement dated February 24, 1994 (together, the "Old Severance Agreement"), providing for the payment of certain benefits to Boylan if Boylan's employment is terminated after a change in control of the Corporation; and WHEREAS, Boylan desires to resign voluntarily from all positions and from employment with the Corporation and any of its affiliates and subsidiaries, while remaining a director and Chairman of the Board until the next meeting of shareholders at which directors are elected, and to settle all claims arising out of his employment with the Corporation and/or its related and subsidiary companies and the separation from that employment, including releasing the Corporation from any claims or rights that he has or may have under the Old Severance Agreement, which is intended to be terminated hereby; and WHEREAS, the Corporation desires that, following Boylan's aforesaid resignation of employment, upon the terms and conditions herein set forth, Boylan thereafter serve as a consultant to the Corporation and Boylan desires to serve in that capacity, upon the terms and conditions of a consulting agreement, as herein provided; and NOW, THEREFORE, in consideration of the premises and the mutual promises contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties agree as follows: 1. CORPORATION. For and in consideration of the representations, covenants, promises, agreements and acknowledgements made by Boylan contained herein, and his performance thereof, the sufficiency of which is hereby acknowledged: (a) For a period of eleven (11) months from the date first set forth above, Boylan shall serve as a consultant to the Corporation, upon the terms and conditions set forth in the consulting agreement attached hereto (the "Consulting Agreement"), which has been entered into by the Parties contemporaneously herewith. (b) Except with respect to those options held by Boylan to purchase 291,667 shares of Choices common stock, at an exercise price of $1.25 per share, which are cancelled and terminated hereby, all options held by Boylan as of the date first set forth above to acquire shares of Choices common stock shall remain in full force and effect, and the Corporation shall use its best efforts to maintain the effective registration under the Securities Act of 1933, as amended (the "Securities Act"), on Form S-8 (or on such other form as may be appropriate), of all shares underlying such options, for so long as such options are outstanding. (c) The Corporation hereby accepts Boylan's voluntary resignation (contained in Paragraph 2 below) from all positions and from employment with the Corporation and any of its affiliates and subsidiaries, except that Boylan shall remain a director and Chairman of the Board of the Corporation until the next meeting of shareholders at which directors are elected. 2. BOYLAN COVENANTS. For and in consideration of the above-referenced payments and the covenants, promises, agreements and acknowledgements of the Corporation contained herein, and its performance thereof, the sufficiency of which is hereby acknowledged: (a) Boylan hereby voluntary resigns from all positions and employment with the Corporation and any of its affiliates and subsidiaries, effective as of the date first set forth above, provided, however, that he shall continue as a director and Chairman of the Board of the Corporation until the next meeting of shareholders at which directors are elected. (b) Boylan shall not file, pursue or prosecute any suit, charge, complaint, action or claim of any nature whatsoever arising out of his employment with the Corporation and/or its related and/or subsidiary companies, or his separation from such employment. Boylan further, for himself and his estate, agents, attorneys, successors, heirs, executors, administrators, and assigns, irrevocably and unconditionally releases and discharges the Corporation and its subsidiary corporations, and their affiliates, directors, officers, employees, representatives, agents, attorneys, predecessors, successors, and assigns (hereinafter collectively referred to as the "Corporation Releasees") from any and all rights, demands, actions, causes of actions, suits, debts, charges, complaints, claims, liabilities, obligations, promises, agreements, controversies, damages and expenses (including attorneys fees and costs actually incurred) of any nature whatsoever, in law or -2- equity, whether known or unknown, which he ever had, now has, or may have had, against the Corporation Releasees since the beginning of time to the date of execution of this Agreement, including, but not limited to, any and all rights, claims, obligations or liabilities arising under the Old Severance Agreement, and any and all tort or contract claims and any and all claims arising under Federal, state or local statutes, ordinances, resolutions, regulations or constitutional provisions prohibiting discrimination on the basis of race, color, religion, sex, age, national origin and/or physical or mental disability; provided, however, that such release and discharge do not apply to (i) claims, demands or causes of action for breach of the Consulting Agreement, (ii) any of the undertakings or other provisions contained in the Consulting Agreement or in this Agreement, (iii) any rights of indemnification under the Corporation's by-laws, including but not limited to those rights of indemnification relating to the existing litigation in the Los Angeles County Superior Court entitled Gary N. Gibbs, et al. v. Choices Entertainment Corporation, et al. Without limiting the foregoing, Boylan specifically waives and releases any and all claims and rights which he has or may have against the Corporation Releasees, or any of them, based upon or arising under Title VII of the Civil Rights Act of 1964, the Americans With Disabilities Act, 42 U.S.C. Sections 1981 and 1983, and applicable state and local laws, each as amended. Boylan hereby further agrees that if any such claim referenced herein is filed, pursued or otherwise prosecuted by him, individually or collectively, or by persons or entities acting by or through him, individually or collectively, Boylan waives his rights to relief from such claim, including the right to attorney's fees, costs and any and all other relief, whether legal or equitable, sought in such claim, and agrees to indemnify and hold the Corporation Releasees harmless from such claim, including attorney's fees and costs. (c) Boylan consents to the cancellation and termination, effective immediately, of those options held by him on the date first set forth above to purchase 291,667 shares of Choices common stock, at an exercise price of $1.25 per share, which options are hereby rendered null and void. (d) Boylan acknowledges that he shall have seven (7) days following his execution of this Agreement in which to rescind or withdraw his waiver of claims of age discrimination stated above and that, in the event he exercises such right of rescission and/or withdrawal of waiver, this Agreement and the Consulting Agreement shall become null and void and of no further effect. 3. REPRESENTATIONS. The Parties represent and certify that they have carefully read and fully understand all of the provisions of this Agreement, that they have had ample and adequate opportunity to discuss thoroughly all aspects of this Agreement with legal counsel of their own choosing, that they are voluntarily entering -3- into this Agreement and that no representations have been made other than those set forth explicitly herein. Boylan specifically acknowledges: (i) that he has been provided a reasonable time up to and including twenty-one (21) calendar days in which to consider the terms of this Agreement, even if executed prior to the expiration of that period, and (ii) that the law firm of Earp, Cohn, Leone & Pendery, A Professional Corporation, including any attorney in that firm with whom he has communicated, has solely represented the Corporation in connection with this Agreement and the Consulting Agreement and has not jointly represented Boylan and the Corporation, and that such law firm has advised Boylan he should obtain legal counsel in connection with this Agreement and the Consulting Agreement. 4. INTERPRETATION. The Parties understand and agree that this Agreement shall in all respects be interpreted, enforced and governed under the laws of the State of Delaware, without regard to principles of conflicts of laws, and that the language of this Agreement shall in all respects be interpreted as a whole, according to its fair meaning, and not strictly for or against either of the Parties, regardless of which is the drafter of this Agreement. 5. ENTIRE AGREEMENT AND MODIFICATION. The Parties further agree that this Agreement and the Consulting Agreement set forth the entire agreement among the Parties with respect to the subject matter hereof and thereof and fully supersede any and all prior agreements or understandings between them, including, without limitation, the Old Severance Agreement, which is terminated hereby and rendered null and void. This Agreement may be amended or superseded only by a subsequent writing, executed by the Parties. 6. ASSIGNMENT. This Agreement shall not be assignable by Boylan, but shall be binding on Boylan and his estate, agents, attorneys, successors, heirs, executors, administrators, insurers and assigns, and shall be binding on and inure to the benefit of the Corporation Releasees and their estates, agents, attorneys, successors, heirs, executors, administrators, insurers and assigns. 7. LITIGATION. Except as may otherwise be provided to the contrary elsewhere in this Agreement, in the event of litigation arising under this Agreement, the Parties agree that the prevailing Party shall be entitled to recover from the non-prevailing Party -4- its reasonable attorneys' fees and expenses incurred in connection with such litigation at all levels. IN WITNESS WHEREOF, and intending to be legally bound hereby, the Parties have executed this Agreement on this 25th day of October, 1996, as of the date first set forth above. /s/ John A. Boylan ---------------------------------------- John A. Boylan CHOICES ENTERTAINMENT CORPORATION By /s/ Ronald W. Martignoni ------------------------------------- Ronald W. Martignoni, Chief Executive Officer -5- EX-10.B 3 EX-10.B Exhibit 10(b) CONSULTING AGREEMENT This Consulting Agreement (this "Agreement"), made and entered into as of the 15th day of August, 1996, by and between Choices Entertainment Corporation, a Delaware corporation (the "Company"), and John A. Boylan (the "Consultant") (the Company and Boylan are sometimes collectively referred to herein as the "Parties"). W I T N E S S E T H: WHEREAS, while remaining a director and Chairman of the Board until the next meeting of shareholders at which directors are elected, Consultant has resigned from all other positions and from employment with the Corporation and any of its affiliates and subsidiaries; and WHEREAS, Consultant, prior to such resignation, performed valuable services for the Company; and WHEREAS, the Company desires to retain Consultant to consult with the Company in the capacity of an independent contractor and Consultant desires to consult with the Company in such capacity, all subject to and upon the terms and conditions hereinafter set forth. NOW, THEREFORE, in consideration of the premises and the mutual promises set forth herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties hereto agree as follows: 1. For a period of eleven (11) months from the date hereof (the "Consulting Period"), Consultant shall serve as a consultant to the Company, subject to the terms and conditions herein set forth. 2. Consultant's services shall include consultation with, and advice to, the Company concerning matters within his areas of knowledge and expertise. In particular, Consultant shall focus his efforts on possible mergers and acquisitions and in resolving claims on behalf of the Company. Consultant shall render such written reports relating to his consulting services as the Company may request. 3. During the Consulting Period, Consultant shall be subject to the direction and supervision of the Chief Executive Officer. Consultant agrees to perform his work with reasonable efficiency and to devote all of his time, energy and ability, while he is performing consulting services, in the best interests of the Company. 4. As compensation for the consulting services contemplated hereby, the Company shall pay to Consultant twenty-two (22) bi-weekly payments of $3,500 each, with the first such payment due on September 6, 1996. Consultant shall indemnify and hold the Company harmless from any taxes or similar charges that the Company is required to pay on account of any amounts paid to the Consultant hereunder. 5. Consultant shall be entitled to the following benefits: (a) For a period of one year from the date hereof, the current health insurance coverage provided to Consultant and his family shall remain in effect, and shall be paid for by the Company. (b) During the Consulting Period, the Consultant shall be entitled to the continued use of the automobile currently provided to him. Thereafter, Consultant shall return the automobile to the Company in the same condition, subject to wear from normal usage. All additional costs to the Company that are accrued after the date hereof as a result of such use by Consultant, without regard to business or personal use, shall be paid by Consultant or, in the sole discretion of the Company, paid by Company, in which event such costs shall be reimbursed to the Company by Consultant. Any such amounts paid by the Company may be offset against any consulting fees due Consultant hereunder. All such additional costs incurred during the Consulting Period, which are the sole responsibility of Consultant, include, but are not limited to, repair and maintenance costs, premiums for insurance, fuel and related charges, and lease payments for all additional mileage above 106,000 miles (being the agreed upon approximate mileage for said automobile on the date hereof). (c) The Company shall continue to pay for Consultant's legal defense and to indemnify him with respect to the existing litigation in the Los Angeles County Superior Court entitled Gary N. Gibbs, et al. v. Choices Entertainment Corporation, et al. 6. It is expressly understood that Consultant is an independent contractor and not an employee of the Company and, as such, Consultant shall receive no compensation or benefits, except as set forth herein or which may be mutually agreed upon, in writing, by the Parties hereto. 7. The Company has been induced to enter into this Agreement in part by reason of the covenants hereinafter set forth in this Paragraph. In view of the fact that Consultant's work as a consultant for the Company will bring him into contact with many confidential affairs of the Company, Consultant will not utilize, other than for Company business, any such confidential information or material, or disclose such confidential information or material to anyone outside the Company or to any unauthorized person, whether or not -2- employed by the Company, during the term of this Agreement or at any time thereafter. All documents or other records regarding the Company's operation or business, whether or not prepared by Consultant either solely or in combination with others, will remain the sole property of the Company and Consultant will deliver all such documents and records to the Company without request upon termination of this Agreement. In the event of the violation of any of the foregoing covenants, the Company shall have the right to equitable relief by injunction or otherwise, in addition to all rights and remedies afforded by law, including, among other things, the right to recover damages sustained by reason of any such violation. 8. This Agreement shall be binding upon and inure to the benefit of the parties hereto, their respective legal representatives and any successor to the Company, which successor shall be deemed substituted for the Company under the terms of this Agreement. This Agreement may not be assigned by Consultant. 9. The waiver by the Company of the breach of any provision of this Agreement shall not operate or be construed as a waiver of any subsequent breach by Consultant. 10. In the event that any provision of this Agreement or any application thereof shall be judged by any court of competent jurisdiction to be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of all other applications of that provision, and of all other provisions and applications hereof, shall not in any way be affected, and such invalid, illegal or unenforceable provision or application shall be deemed not to be a part of this Agreement, and this Agreement shall then be enforced to the maximum extent allowed by the applicable law. 11. Except as otherwise provided in the Severance Agreement (the "Severance Agreement"), entered into between the Parties hereto and dated an even date herewith, this Agreement sets forth all of the terms, conditions and agreements of the parties relative to the subject matter hereof and supersedes any and all such former agreements with respect thereto, and any and all such former agreements are hereby declared terminated and of no further force and effect upon execution and delivery hereof. There are no terms, conditions or agreements with respect hereto, except as provided herein and in the Severance Agreement, and no amendment of this Agreement shall be effective unless reduced to writing and executed by the parties. 12. This Agreement shall be construed and enforced in accordance with the laws of the State of Delaware, without regard to principles of conflicts of laws. -3- 13. In the event of litigation arising under this Agreement, the parties agree that the prevailing party shall be entitled to recover from the non-prevailing party its reasonable attorneys' fees and expenses incurred in connection with such litigation at all levels. IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. CHOICES ENTERTAINMENT CORPORATION By:/s/ Ronald W. Martignoni ------------------------------- Ronald W. Martignoni Chief Executive Officer /s/ John A. Boylan ---------------------------------- John A. Boylan -4- EX-27 4 EX-27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF CHOICES ENTERTAINMENT CORPORATION AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 9-MOS DEC-31-1996 SEP-30-1996 66,942 0 33,021 0 168,907 329,193 5,224,350 4,371,981 1,467,079 1,924,336 0 0 0 220,044 (1,357,301) 1,467,079 3,877,249 3,877,249 660,536 660,536 3,656,806 0 37,297 0 0 0 0 0 0 (477,390) (0.02) (0.02)
EX-99.5 5 EX-99.5 EXHIBIT 99(a) [LETTERHEAD OF WEST COAST ENTERTAINMENT CORPORATION] October 30, 1996 PRIVATE AND CONFIDENTIAL Board of Directors c/o Ronald Martignoni, President Choices Entertainment Corporation 836 West Trenton Avenue Morrisville, PA 19067 Re: NON-BINDING LETTER OF INTENT TO ACQUIRE ASSETS Gentlemen: We are delighted to attach the following Summary of Terms and Conditions outlining the principal tenets of a definitive agreement with Choices Entertainment Corporation (the "Seller"). The following terms and conditions are what we discussed and sets forth the terms and conditions under which we could extend an offer to acquire your stores. PURCHASE OF ASSETS SUMMARY TERMS AND CONDITIONS Acquisition: Purchase of all of the assets of the Seller for the retail video stores as listed on attached Exhibit "A", a total of nine (9) stores which are owned by Seller. Purchase Price: Two Million Seven Hundred Thousand Dollars ($2,700,000) payable $1,200,000 in cash and $1,500,000 in common stock. The purchase price is based on Seller's net operating cash flow for the period from October 1, 1995 through September 30, 1996. The base purchase price shall be reduced if the net operating cash flow for such period as determined by the Buyer is less than $700,000. Such reduction shall be in an amount equal to: $2,700,000 - ($2,700,000 x Cash Flow) ------------------------ $700,000 Choices Entertainment Corporation October 30, 1996 Page 2 Cash flow is defined as EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) less actual rental purchases. Purchase price is subject to adjustment for quantity and quality of rental inventory on hand, store improvements, furniture and fixtures and computer systems which do not meet current standards of West Coast Entertainment Corporation (the "Buyer"). The stock will be priced based on the average of the closing prices for the 15 trading days two days prior to the date of settlement. Prepaid Expenses: There shall be no apportionment or adjustment for prepaid expenses or deposits. Description of Common Stock: Common Stock will be registered and that of West Coast Entertainment Corporation (the "Buyer"), subject to a 12 to 18 month period lock-up as described below. Restrictions on Trading Common Stock: The Sellers have a restriction on selling their shares as follows: 40% eligible to be sold in the open market after 12 months; 100% eligible to be sold in the open market after 18 months. Exclusive Right to Purchase: Seller agrees that Buyer shall have the exclusive right to purchase Seller's stores upon execution of this letter. Such exclusive rights shall extend until January 31, 1997, unless mutually extended. Both Seller and Buyer warrant and agree that they will negotiate in good faith and use their best efforts to sign a definitive agreement evidencing the basic terms outlined in this Letter of Intent by November 15, 1996. This Exclusive Right shall terminate if a definitive agreement has not been reached by November 15, 1996. Anticipated Closing Date: January 31, 1997. Operating Cash Flow: Seller warrants that its cash flow equals or exceeds $700,000 for the 12 months ended September 30, 1996. Break Up Fee: If the Seller's shareholders do not approve the transaction contemplated herein, West Coast Entertainment will receive a break-up fee of $100,000, payable in cash, which will be applied to the option agreement described below. Choices Entertainment Corporation October 30, 1996 Page 3 Warranties and Agreements: Sellers and principals agree to sign a five year video and electronic game retailing non-competition agreement with WCEC. Sellers and the principals will enter into an asset purchase agreement containing customary representations, warranties, indemnification provisions and covenants. Short Term Advance: Upon execution of a definitive Asset Purchase Agreement, West Coast Entertainment Corporation will advance to the Seller, against delivery of a secured demand promissory note bearing simple interest at the rate of 12% per annum, the amount of $150,000. Demand will not be made until after January 31, 1997. Option to Purchase Newtown Store: If the Seller's shareholders fail to approve the transaction contemplated hereby by January 31, 1997, West Coast Entertainment shall have the option (exercisable within 180 days after such date) to purchase all of the Seller's assets relating to its retail video store located in Newtown, Pennsylvania, for a price of $250,000 in cash. (Such price may be paid by surrender of the breakup fee described above, and forgiveness of $150,000, of the demand note describe above.) Such assets shall include all security deposits, prepaid expenses and other assets (exclusive of cash in bank accounts, but inclusive of $600 of cash on hand at the store). West Coast shall, in connection with the exercise of any such option, assume the Seller's lease with respect thereto. If West Coast exercises such option, West Coast and the Seller shall enter into a definitive asset purchase agreement substantially in the form of the agreement negotiated with respect to the transaction described in this letter. Seller Expenses: The Seller shall be responsible for all expenses incurred by it in connection with the transaction contemplated hereby, including without limitation, all costs incurred in connection with obtaining shareholder approval of the transaction. Purchase Contingencies: 1) Pre-closing audit and due diligence by Buyer exposes no material discrepancies in cash flow calculation or other material issues; 2) Customary conditions to closing; 3) Execution of definitive mutually acceptable documents; and Choices Entertainment Corporation October 30, 1996 Page 4 4) Shareholder approval by Seller Description of Assets: Assets to be purchased by Buyer are all of the assets of Seller including but not limited to leaseholds, improvements, equipment, rental tapes and games and rental equipment, security deposits, goodwill, corporate names, all trademarks and other intellectual property. The purchase does not include cash on hand, except for a total of $600 per store for the stores' cash registers. Buyer will assume no liabilities of Seller (other than the store leases). Assets to be delivered free and clear of any liens or encumbrances. THIS SUMMARY OF TERMS AND CONDITIONS IS NOT A BINDING COMMITMENT TO PURCHASE THE ASSETS OF SELLER AND DOES NOT CREATE ANY OBLIGATION ON THE PART OF WEST COAST ENTERTAINMENT CORPORATION. THIS OUTLINE IS ONLY A BRIEF DESCRIPTION OF THE PRINCIPAL TERMS OF A DEFINITIVE AGREEMENT BETWEEN BUYER AND SELLER AND IS INTENDED PRINCIPALLY FOR DISCUSSION PURPOSES. BUYER AND SELLER WARRANT THAT THEY WILL USE THEIR BEST EFFORTS TO NEGOTIATE AND SIGN A DEFINITIVE AGREEMENT PRIOR TO NOVEMBER 15, 1996. This offer will be outstanding until Thursday, November 8, 1996 at 5:00 p.m., at which point it will be withdrawn. /s/ RICHARD KELLY - - - ------------------------------- --------------------------------- T. Kyle Standley Richard Kelly Chief Executive Officer Chief Financial Officer /s/ JOHN A. BOYLAN /s/ RONALD W. MARTIGNONI - - - ------------------------------- --------------------------------- John A. Boylan Ronald W. Martignoni Director President, Director /s/ FRED E. PORTNER - - - ------------------------------- Fred E. Portner Director EXHIBIT "A" CHOICES ENTERTAINMENT CORPORATION LIST OF LOCATIONS #1 Morrisville Shopping Center #9 Shoppes at Foxmoor West Trenton & Pennsylvania Ave. 1027 Washington Blvd. & Rte 133 Morrisville, PA Robbinsville, NJ 215-295-9400 609-443-9400 #2 Winslow Shopping Plaza #10 Jamesway Plaza 542 Berlin Cross Keys Road Delsea Drive Sicklersville, NJ Glassboro, NJ 609-875-3577 609-881-4730 #5 Lower Makefield Shopping Center #12 Fox Run Shopping Center 678-80 Stony Hill Road 200 Foxhunt Drive Yardley, PA Bear, DE 215-493-4010 302-834-9120 #6 Village at Newtown #13 Choices Movies & Games South Eagle Road 8799 Frankford Avenue Newtown, PA Philadelphia, PA 19136 215-579-1960 215-708-3220 (To be opened 11/15/96) #7 Town Center 406 Town Center New Britain, PA 215-230-8880 -----END PRIVACY-ENHANCED MESSAGE-----