-----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, TWklhhwUG4k01V/XrR+Nw7J63wicAwM+u076+uJgoa2ibEMYEPLby/HPPS9wQT+O JcdvX07F9KC4J6TxJMqVHg== 0000950109-95-003187.txt : 19980423 0000950109-95-003187.hdr.sgml : 19980423 ACCESSION NUMBER: 0000950109-95-003187 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19950630 FILED AS OF DATE: 19950814 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: 95563111 BUSINESS ADDRESS: STREET 1: 81 BIG OAK RD STREET 2: STE 205 CITY: MORRISVILLE STATE: PA ZIP: 19067 BUSINESS PHONE: 2154281000 MAIL ADDRESS: STREET 1: 81 BIG OAK RD SUITE 205 CITY: MORRISVILLE STATE: PA ZIP: 19067 FORMER COMPANY: FORMER CONFORMED NAME: DATAVEND INC DATE OF NAME CHANGE: 19900401 10QSB 1 FORM 10-QSB U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ____________ FORM 10-QSB (Mark One) [X] Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended June 30, 1995 ----------------- [_] 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) 81 Big Oak Road, Suite 205, 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 August 11, 1995: 21,964,395 Transitional Small Business Disclosure Format (check one): Yes No X ----- ------ PART I: FINANCIAL INFORMATION - - ------------------------------ ITEM 1. FINANCIAL STATEMENTS CHOICES ENTERTAINMENT CORPORATION BALANCE SHEETS
June 30, 1995 December 31, 1994 -------------- ------------------ (Unaudited) (Audited) ASSETS - - ------ Current assets: Cash......................................... $ 34,042 $ 129,389 Accounts receivable.......................... 926 1,439 Merchandise inventories...................... 195,418 425,357 Prepaid expenses............................. 66,560 24,112 ------------ ------------ Total current assets....................... 296,946 580,297 Videocassette rental inventory, net............ 850,834 841,966 Equipment, net (Note 2)........................ 290,076 346,956 Intangible assets, net......................... 197,863 206,282 Other deferred costs........................... 237,063 238,750 Other assets................................... 68,227 68,227 ------------ ------------ $ 1,941,009 $ 2,282,478 ============ ============ LIABILITIES AND STOCKHOLDERS' DEFICIT - - ------------------------------------- Current liabilities: Notes payable................................ $ 182,730 $ 480,362 Accounts payable............................. 552,015 779,659 Accrued merger and acquisition............... expenses (Note 5).......................... 1,004,849 119,054 Accrued professional fees.................... 207,691 745,374 Accrual for lease cancellation and litigation reserves........................ 95,986 103,486 Accrued salaries............................. 48,390 58,670 Other accrued expenses....................... 71,282 98,920 ------------ ------------ Total current liabilities.................. 2,162,943 2,385,525 Other liabilities.............................. 200,000 200,000 Other accrued expenses......................... 138,750 ------------ ------------ Total liabilities.......................... 2,362,943 2,724,275 ------------ ------------ Stockholders' deficit: Preferred stock, par value $.01 per share: Authorized 5,000 shares; no shares issued or outstanding in 1995 or 1994............. Common stock, par value $.01 per share: authorized 50,000,000 shares; issued and outstanding 21,960,395 shares in 1995 and 18,654,934 in 1994................ 219,604 186,549 Additional paid-in capital................... 20,176,323 18,631,441 Accumulated deficit.......................... (20,817,861) (19,259,787) ------------ ------------ Total stockholders' deficit.................... (421,934) (441,797) ------------ ------------ $ 1,941,009 $ 2,282,478 ============ ============
See accompanying notes to financial statements. -2- CHOICES ENTERTAINMENT CORPORATION STATEMENTS OF LOSS (Unaudited)
For the Three Months For the Six Months Ended June 30, Ended June 30, ----------------------- ------------------------- 1995 1994 1995 1994 ---------- ---------- ----------- ----------- Revenues: Movie rentals................... $ 903,381 $ 929,286 $ 1,925,333 $2,138,115 Merchandise sales............... 181,327 398,093 441,830 827,363 ---------- ---------- ----------- ---------- 1,084,708 1,327,379 2,367,163 2,965,478 ---------- ---------- ----------- ---------- Operating costs and expenses: Cost of goods sold.............. 168,767 340,219 430,049 679,599 Cost of movie rentals........... 1,110 26,940 7,712 91,220 Store payroll................... 256,904 278,592 538,009 581,580 Store rents..................... 241,450 225,264 486,413 457,030 Other store operating expenses....................... 98,604 103,644 221,444 238,829 Selling and administrative expenses....................... 240,195 180,512 450,220 356,478 Merger and acquisition expenses (Note 5)............. 640,910 1,378,814 Professional and consulting expenses....................... 61,741 54,503 114,290 123,477 Loss on disposal of video- cassette rental inventory...... 43,721 96,785 79,712 104,756 Store closing, lease term- ination and litigation provisions..................... 76 3,720 Depreciation and amortization. 309,585 310,258 608,111 616,382 ---------- ---------- ----------- ---------- 2,062,987 1,616,793 4,314,774 3,253,071 ---------- ---------- ----------- ---------- Other income (expenses): Gain on settlement of debt (Note 4).................. 395,640 Interest expense, net........... (3,205) (7,320) (6,103) (12,615) ---------- ---------- ----------- ---------- (3,205) (7,320) 389,537 (12,615) ---------- ---------- ----------- ---------- Net loss.......................... $ (981,484) $ (296,734) $(1,558,074) $ (300,208) ========== ========== =========== ========== Net loss per share of common stock (Note 3).................... $ (0.04) $ (0.02) $ (0.07) $ (0.02) ========== ========== =========== ==========
See accompanying notes to financial statements. -3- CHOICES ENTERTAINMENT CORPORATION STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) FOR THE SIX MONTHS ENDED JUNE 30, 1994 AND 1995 (UNAUDITED)
Common Stock Additional ------------------------ Paid-In Accumulated Shares Amount Capital Deficit Total ------------ ---------- ----------- ------------- ---------- Balance at December 31, 1993 18,478,934 $184,789 $18,420,976 $(18,271,648) $ 334,117 Reversal of costs associated with previous warrant exercises 144,578 144,578 Net Loss for the six months ended June 30, 1994 (300,208) (300,208) ---------- -------- ----------- ------------ --------- Balance at June 30, 1994 18,478,934 $184,789 $18,565,554 $(18,571,856) $ 178,487 ========== ======== =========== ============ ========= Balance at December 31, 1994 18,654,934 $186,549 $18,631,441 $(19,259,787) $(441,797) Issuance of Common Stock for cash from exercise of stock options and warrants 2,142,000 21,420 874,215 895,635 Issuance of Common Stock for cash to two private foreign investors, net of related costs 900,000 9,000 387,000 396,000 Issuance of Common Stock to satisfy debt obligations 113,461 1,135 146,417 147,552 Issuance of Common Stock in conjunction with consulting services 150,000 1,500 137,250 138,750 Net Loss for the six months ended June 30, 1995 (1,558,074) (1,558,074) ---------- -------- ----------- ------------ --------- Balance at June 30, 1995 21,960,395 $219,604 $20,176,323 $(20,817,861) $(421,934) ========== ======== =========== ============ =========
See accompanying notes to financial statements. -4- CHOICES ENTERTAINMENT CORPORATION STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Six Months Ended June 30, ------------------------ 1995 1994 ----------- ---------- Cash flows from operating activities: Net loss............................................ $(1,558,074) $(300,208) ----------- --------- Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation and amortization.................... 573,423 616,382 Gain on settlement of debt....................... (395,640) Cost of rental films sold........................... 128,730 93,351 Loss on disposal of rental films.................... 79,712 104,756 Amortization of other deferred costs................ 34,688 Change in assets and liabilities: Decrease in accounts receivable................ 513 3,899 Decrease in merchandise inventories............ 229,939 56,735 Increase in prepaid expenses................... (42,449) (22,715) Decrease in other assets....................... 17,999 Increase in other deferred costs............... (33,000) Increase (decrease) in accounts payable........ (115,143) 126,118 Increase in accrued merger and acquisition expenses......................... 885,794 Increase (decrease) in accrued professional fees............................ (254,524) 2,902 Increase (decrease) in accrued salaries........ (10,279) 34,946 Decrease in accrual for lease cancellation and litigation reserves...................... (7,500) (106,077) Decrease in other accrued expenses............. (27,638) (29,083) ----------- --------- Total adjustments................................... 1,046,626 899,213 ----------- --------- Net cash provided by (used in) operating activities....................................... (511,448) 599,005 ----------- --------- Cash flows from investing activities: Purchase of equipment, net........................ (74,329) Purchase of videocassette rental films............ (651,104) (612,304) ----------- --------- Net cash used in investing activities............... (725,433) (612,304) ----------- --------- Cash flows from financing activities: Proceeds from issuance of common stock........... 1,291,635 Repayment of notes payable....................... (150,101) (50,865) ----------- --------- Net cash provided by (used in) financing activities....................................... 1,141,534 (50,865) ----------- --------- Net decrease in cash................................ (95,347) ( 64,164) Cash at beginning of period......................... 129,389 185,125 ----------- --------- Cash at end of period............................... $ 34,042 $ 120,961 =========== ========= Supplementary disclosure of cash flow information: Cash paid during the year for interest........... $ -0- $ 9,947 =========== =========
See accompanying notes to financial statements. -5- CHOICES ENTERTAINMENT CORPORATION NOTES TO FINANCIAL STATEMENTS (UNAUDITED) Note 1 - Basis Of Presentation And Significant Accounting Policies - - ---------------------------------------------- The financial information included herein for the three-month and six-month periods ended June 30, 1995 and 1994, and as of June 30, 1995, 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 three-month and six-month periods ended June 30, 1995, are not necessarily indicative of the results to be expected for the full year. Note 2 - Equipment - - ------------------ Equipment at June 30, 1995, 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 three-month and six-month periods ended June 30, 1995 and 1994, was computed by dividing the net loss by the weighted average number of common shares outstanding during the period.
Three Months Ended Six Months Ended June 30, June 30, ---------------------- ---------------------- 1995 1994 1995 1994 ---------- ---------- ---------- ---------- Number of shares used in calculations 21,848,000 18,479,000 21,328,000 18,479,000 ========== ========== ========== ==========
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 $20,817,861 from inception to June 30, 1995, including a net loss of $1,558,074 for the six-month period ended June 30, 1995. -6- CHOICES ENTERTAINMENT CORPORATION NOTES TO FINANCIAL STATEMENTS - CONTINUED (UNAUDITED) Note 4 - Liquidity (Continued) - - ------------------------------ The Company is currently operating in a severely distressed financial condition. As of June 30, 1995, the Company had a net working capital deficiency of approximately $1,866,000. In addition, the Company is in immediate need of financing to fund its short-term working capital needs, as well as costs of an acquisition program (see Note 5). The Company's viability is and will continue to be dependent upon its ability to secure needed capital for the foreseeable future. The Company is currently funding its business on a day-to-day basis from revenues generated from its 11 store operations. Additionally, the Company has negotiated equity and discounted cash settlements with several creditors which eliminated approximately $1,006,000 of debt for approximately $463,000 and 263,000 shares of the Company's Common Stock, thereby resulting in a net gain of approximately $396,000 to the Company. As an additional source of funding, the Company has commenced a private offering (see Note 7) of units consisting of preferred stock, promissory notes, and warrants to purchase preferred stock. The terms of the private offering provide for gross maximum and minimum proceeds of approximately $4,020,000 and $1,020,000, respectively. Any proceeds from the private offering will be used to fund, among other things, the closing costs of three initial acquisitions (see Note 5) and certain short-term working capital requirements. As of the date of this report, the Company has raised and drawn down $1,020,000, the minimum amount under the offering. Although the offering is continuing there is no assurance that it will be completed. Note 5 - Acquisition Program - - ---------------------------- In late 1994, the Company formulated a new business plan through which it has begun to introduce a new management team and develop a new operating structure through the acquisition of numerous local and regional retail video store chains (the "Acquisition Program"). It was previously reported that the Company was actively pursuing 14 retail video store chains with which it had entered into letters of intent in addition to JD Store Equipment, Inc. ("JD"), a supplier of retail store equipment (collectively, the "Acquisition Candidates"). The majority of such letters of intent have expired, and, although no assurances can be given, the Company hopes to reestablish negotiations with such entities after it has completed the proposed acquisitions set forth below. While the Company has allowed substantially all of the letters of intent with the Acquisition Candidates to expire, it has narrowed its focus and is actively pursuing the acquisition of -7- CHOICES ENTERTAINMENT CORPORATION NOTES TO FINANCIAL STATEMENTS - CONTINUED (UNAUDITED) Note 5 - Acquisition Program (Continued) - - ---------------------------------------- three entities, including JD, VA Entertainment Corp., d/b/a Video Junction, and Palmer Corporation ("Palmer"). In connection therewith, the Company has, as previously reported, entered into definitive agreements with such entities. However, each of the proposed acquisitions is subject to a number of conditions, including the receipt of audited financial statements, the receipt of third party consents, the receipt of a fairness opinion regarding the JD acquisition, and the completion of satisfactory due diligence and acquisition financing. The definitive agreements are also subject to possible changes by amendment prior to closing of the transactions. Further, two of the three mergers are each conditioned upon concurrent closing of the other, and the third merger is conditioned upon the concurrent closing of the other two mergers. The Company has also incurred significant professional fees related to the Acquisition Program and expects to continue to incur professional fees and other acquisition costs. The Company has sought to minimize the amount of cash financing needed to complete these initial acquisitions by structuring them, primarily, as all-stock (or stock and debt) transactions; however, the debt to be issued in connection with one of the initial three acquisitions will be required to be paid within 120 days of the closing of such transaction. The Company currently does not have sufficient financing in place to fund all of the costs associated with the above acquisitions or any other additional acquisitions where part or all of the purchase price would be paid in cash. The Company is seeking financing for the closing costs associated with the first three acquisitions, as well as for certain of the Company's other short-term working capital needs, through a private offering of units consisting of preferred stock, promissory notes, and warrants to purchase preferred stock (see Note 7). No assurances may be given that this or any other source of financing will be available to the Company in sufficient amounts or on reasonable terms. In view of the numerous conditions to closing which remain to be satisfied as to the foregoing acquisitions, there can be no certainty as to whether these acquisitions can ultimately be completed by the Company. Even if such acquisitions are successfully completed, there can be no assurances that the Company will be successful in implementing its business plan or that such business plan will be profitable. In the event the Company is not successful in implementing its Acquisition -8- CHOICES ENTERTAINMENT CORPORATION NOTES TO FINANCIAL STATEMENTS - CONTINUED (UNAUDITED) Note 5 - Acquisition Program (Continued) - - ---------------------------------------- Program, it is likely that it will continue to operate through the 11 stores currently owned, which have historically provided insufficient revenues to enable the Company to operate profitably. To the extent that the Company finances any of its acquisitions with short- term debt, the Company will be required to raise additional equity or debt financing to retire such debt. The availability of such financing on acceptable terms cannot be assured. To achieve and sustain significant growth over a longer period, the Company would require increasingly greater amounts of capital. Therefore, in the future, the Company may seek to raise financing through public or private sales of equity and debt securities and may seek to establish various types of credit facilities, such as bank loans and lines of credit. There is no assurance that the Company can obtain any such financing on terms that will enable the Company to implement a long-term growth strategy. As the Company intends to issue a large number of additional shares of Common Stock and Preferred Stock which may become convertible into shares of Common Stock in connection with the Company's Acquisition Program and financing activities, stockholders of the Company are likely to experience substantial and continuing dilution as to ownership percentage and voting rights. Further, the price of the Company's Common Stock may be subject to potentially large fluctuations. Note 6 - Common Stock and Stock Options - - --------------------------------------- Between January 1, 1995 and June 30, 1995, the Company issued 3,305,461 shares of common stock as follows. In January 1995, the Company completed a private placement of stock for 900,000 shares of the Company's common stock to two private foreign investors. The Company issued 113,461 shares of common stock to a vendor in settlement of a debt, and 150,000 shares of common stock to a firm in connection with a consulting agreement. Additionally, former employees of the Company exercised stock options to purchase 1,992,000 shares and a warrant holder exercised its option to purchase 150,000 shares of common stock. -9- CHOICES ENTERTAINMENT CORPORATION NOTES TO FINANCIAL STATEMENTS - CONTINUED (Unaudited) Note 6 - Common Stock and Stock Options (Continued) - - --------------------------------------------------- In May 1995, an option previously granted to an officer of the Company to purchase 1,000,000 shares of the Company's common stock expired by its terms upon the resignation of the officer from the Company. In June 1995, the Board of Directors approved the grant of options to purchase 1,000,000 shares each of common stock to two key employees of the Company. The options were issued at an exercise price of $.9375. These options vest after six months and are exercisable for a period of five years after the vesting date. The holders of these options are afforded certain anti-dilution and piggy-back registration rights under the 1933 Act with respect to the shares of common stock issuable upon exercise of said options. Additionally, options to purchase 100,000 shares each of common stock were granted to two employees of the Company in accordance with the terms of the 1987 Stock Option and Appreciation Rights Plan, as amended, at an exercise price of $1.19. The exercise prices of the foregoing options represent the market price of the Company's common stock as of the effective date of the grants. Note 7 - Subsequent Events - - -------------------------- On August 4, 1995 the Company amended the terms of a proposed private offering. The offering provides for the maximum sale of up to 67 units and a minimum sale of 17 units at a per unit price of $60,000 or a maximum total of $4,020,000 and a minimum total of $1,020,000. The Company may accept proceeds in excess of the $1,020,000 minimum only upon the closing of the acquisition of JD and Video Junction. Each unit consists of two shares of the Company's Series C Preferred Stock, an unsecured Promissory Note in the principal amount of $40,000, and a three-year Warrant to purchase .35 shares of Series C Preferred Stock. Subject to the approval by the Company's stockholders of an amendment to the Company's Certificate of Incorporation increasing the number of authorized shares of the Company's Common Stock, each share of Series C Preferred Stock may become convertible, at the option of the holder thereof, into 40,000 shares of the Company's Common Stock ("Common Stock"). However, as the conversion of the Series C Preferred Stock is contingent upon stockholder approval of the increase in authorized Common Stock, no assurances can be given that the Series C Preferred Stock will become convertible. Holders of Series C Preferred Stock will be entitled to vote on this and any other matter submitted to a vote of the Company's stockholders, with each share of Series C Preferred Stock entitled to 40,000 votes. -10- CHOICES ENTERTAINMENT CORPORATION NOTES TO FINANCIAL STATEMENTS - CONTINUED (Unaudited) Note 7 - Subsequent Events (Continued) - - -------------------------------------- Any proceeds received from the offering will be used to fund, among other things, the closing costs of the initial three acquisitions referred to in Note 5 and certain short-term working capital requirements. As of the date of this report, the Company has raised and drawn down $1,020,000, the minimum amount under the offering. Although the offering is continuing there can be no assurance that it will be completed. -11- ITEM 2. Management's Discussion And Analysis Of Financial Condition And Results Of Operations The following is Management's discussion and analysis of certain significant factors which have affected the Company's financial condition, changes in financial condition, and results of operations. The discussion also includes the Company's liquidity and capital resources at June 30, 1995 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 June 30, 1995, the Company had a net working capital deficiency of approximately $1,866,000. The Company is currently funding its business on a day-to-day basis from revenues generated from its 11 store operations. Notwithstanding the foregoing, as revenues from the Company's existing 11 stores are insufficient to support the costs of implementing its acquisition program (the "Acquisition Program") as described below, and the expenses associated with a publicly-held company, the Company is currently operating on a negative cash flow basis and is in immediate need of financing to fund its short-term working capital needs. The Company's viability is and will continue to be dependent upon its ability to secure needed capital for the foreseeable future. Acquisition Program. In late 1994, the Company formulated a new business plan through which it has begun to introduce a new management team and develop a new operating structure through the acquisition of numerous local and regional retail video store chains. It was previously reported that the Company was actively pursuing 14 retail video store chains with which it had entered into letters of intent in addition to JD Store Equipment, Inc. ("JD"), a supplier of retail store equipment (collectively, the "Acquisition Candidates"). The majority of such letters of intent have expired, and, although no assurances can be given, the Company hopes to reestablish negotiations with such entities after it has completed the proposed acquisitions set forth below. While the Company has allowed substantially all the letters of intent with the Acquisition Candidates to expire, it has narrowed its focus and is actively pursuing the acquisition of three entities, including JD, VA Entertainment Corp., d/b/a Video Junction, and Palmer Corporation ("Palmer"). In connection therewith, the Company has, as previously reported, entered into definitive agreements with such entities. However, each of the proposed acquisitions is subject to a number of conditions, including the receipt of audited financial statements, the receipt of third party consents, the receipt of a fairness opinion regarding the JD acquisition, and the completion of -12- satisfactory due diligence and acquisition financing. The definitive agreements are also subject to possible changes by amendment prior to closing of the transactions. Further, two of the three mergers are each conditioned upon concurrent closing of the other, and the third merger is conditioned upon the concurrent closing of the other two mergers. The Company has also incurred significant professional fees related to the Acquisition Program and expects to continue to incur professional fees and other acquisition costs. The Company has sought to minimize the amount of cash financing needed to complete these initial acquisitions by structuring them primarily as all-stock (or stock and debt) transactions; however, the debt to be issued in connection with one of the initial three acquisitions will be required to be paid within 120 days of the closing of such transaction. The Company does not have sufficient financing in place to fund all of the costs associated with the above acquisitions or any other additional acquisitions, where part or all of the purchase price would be paid in cash. The Company is seeking financing for the closing costs associated with the first three acquisitions, as well as for certain of the Company's other short- term working capital needs, through a private offering, the proposed terms of which were amended on August 4, 1995. The offering provides for the maximum sale of up to 67 units and a minimum sale of 17 units at a per unit price of $60,000 or a maximum total of $4,020,000 and a minimum total of $1,020,000. The Company may accept proceeds in excess of the $1,020,000 minimum only upon the closing of the acquisition of JD and Video Junction. Each unit consists of two shares of the Company's Series C Preferred Stock, an unsecured Promissory Note in the principal amount of $40,000, and a three-year Warrant to purchase .35 shares of Series C Preferred Stock. Subject to the approval by the Company's stockholders of an amendment to the Company's Certificate of Incorporation increasing the number of authorized shares of the Company's Common Stock, each share of Series C Preferred Stock may become convertible, at the option of the holder thereof, into 40,000 shares of the Company's Common Stock ("Common Stock"). However, as the conversion of the Series C Preferred Stock is contingent upon stockholder approval of the increase in authorized Common Stock, no assurances can be given that the Series C Preferred Stock will become convertible. Holders of Series C Preferred Stock will be entitled to vote on this and any other matter submitted to a vote of the Company's stockholders, with each share of Series C Preferred Stock entitled to 40,000 votes. Any proceeds received from the offering will be used to fund, among other things, the closing costs of the initial three acquisitions referred to above, and certain short-term working -13- capital requirements. As of the date of this report, the Company has raised and drawn down $1,020,000, the minimum amount under the offering. Although the offering is continuing there can be no assurance that it will be completed. In view of the numerous conditions to closing which remain to be satisfied as to all of the foregoing acquisitions, there can be no certainty as to whether these acquisitions can ultimately be completed by the Company. Even if such acquisitions are successfully completed, there can be no assurances that the Company will be successful in implementing its business plan or that such business plan will be profitable. In the event the Company is not successful in implementing its Acquisition Program, it is likely that it will continue to operate through the 11 stores currently owned, which have historically provided insufficient revenues to enable the Company to operate profitably. To the extent that the Company finances any of its acquisitions with short- term debt, the Company will be required to raise additional equity or debt financing to retire such debt. The availability of such financing on acceptable terms cannot be assured. To achieve and sustain significant growth over a longer period, the Company would require increasingly greater amounts of capital. Therefore, in the future, the Company may seek to raise financing through public or private sales of equity and debt securities and may seek to establish various types of credit facilities, such as bank loans and lines of credit. There is no assurance that the Company can obtain any such financing on terms that will enable the Company to implement a long-term growth strategy. In addition, it is anticipated that the Company may be required to pay certain expenses at or prior to the closing of transactions during the first phase of the Acquisition Program, including but not limited to payments (i) to repay advances made to the Company by certain Acquisition Candidates, (ii) related to leasehold terminations, and (iii) relating to severance arrangements with current management. The Company also expects to incur expenses relating to the retrofitting of acquired stores and the development and implementation of a new management information system ("MIS"). The Company intends to finance these costs primarily through private placements of equity securities; however, the availability of such financing or any alternative financing on reasonable terms cannot be assured. Capital Expenditures During the six-month period ended June 30, 1995, the Company's capital expenditures were approximately $651,000 and $74,000, relating to the purchase of videocassette rental films and the purchase of furniture and fixtures, respectively, compared to $612,000 for videocassette rental films purchased during the same period in 1994. In the event that the Company completes any of -14- its proposed acquisitions, the Company anticipates significant increases in capital expenditures for the remainder of the current year, including purchasing of a new MIS system and retrofitting acquired stores to standard fixtures, appearances and logos. Material Changes In Financial Condition Assets: Total assets decreased by approximately $341,000 between December 31, 1994 and June 30, 1995 primarily due to the net decrease in cash which has been used to fund the Company's operations and to the decrease in inventories due to the elimination of the sale of music product in the Company's stores. Liabilities: Total liabilities decreased by approximately $361,000 between December 31, 1994 and June 30, 1995 primarily due to the decreases in notes payable, accounts payable, and accrued professional fees related to the elimination of approximately $1,006,000 of debt from discounted cash settlements. In conjunction with the Company's Acquisition Program, accrued merger and acquisition expenses increased approximately $886,000. Additionally, other accrued expenses decreased by approximately $139,000 primarily due to the issuance of 150,000 shares of common stock to a firm in payment of obligations under a consulting agreement. Stockholders' Deficit: Between December 31, 1994 and June 30, 1995, the net reduction in Stockholders' Deficit of $20,000 was due to the loss during the period of approximately $1,558,000 offset by the issuance of 2,142,000 shares of common stock in connection with various stock option and warrant exercises, a private placement of stock for 900,000 shares to two foreign investors, the issuance of 113,461 shares of stock in settlement of a debt obligation and 150,000 shares of stock issued to a consulting firm as noted above. Net proceeds from the issuance of the common stock was approximately $1,291,000. Material Changes In Results Of Operations Should the Company successfully consummate some or all of the transactions contemplated by the Acquisition Program, it is likely that the Company's results of operations for the balance of 1995 and subsequent years would differ materially from historical results. Although the successful completion of the proposed transactions would be expected to increase the Company's revenue base, it would also result in additional costs, including -15- costs which may be necessary to consolidate certain administrative functions, conform inventory stocking arrangements and eliminate redundant functions. Further, consummation of some or all of the proposed transactions may result in a significant amount of goodwill being recorded by the Company, and such goodwill may need to be amortized on a accelerated basis. As a result of these and other factors, no assurances can be given that the Company will be profitable in future years, even if some or all of the proposed transactions are successfully consummated. Revenues decreased by approximately $243,000 and $598,000 during the three- month and six-month periods ended June 30, 1995, respectively. Approximately $217,000 and $386,000, respectively, of the decrease is related to the decrease in merchandise sales as a result of the elimination of the sale of music products in the Company's stores. Approximately $84,000 of the decrease in revenue during the six-month period is related to the closing of one of the Company's stores during March 1994, and the balance of the decreases during the two periods is related to weather factors, increased industry competition and fewer hot titles released during the period ended June 30, 1995. Cost of goods sold decreased approximately $172,000 and $250,000 but increased approximately 8% and 15% as a percentage of revenue during the three-month and six-month periods, respectively. The percentage increases are primarily attributable to the increase in reserves established against merchandise inventories in conjunction with the elimination of the sale of music products in the Company's stores. Operating expenses, which include store payroll, rents and other operating expenses, decreased approximately $11,000 and $32,000, respectively, during the comparative periods. The decreases are primarily the result of closing one of the Company's stores during March 1994 and of continuing efforts to reduce operating costs. Selling and administrative expenses increased approximately $58,000 and $92,000, respectively, during the comparative periods due primarily to the increase in expenses relating to the support of the Company's Acquisition Program. Merger and acquisition expenses of approximately $641,000 and $1,379,000 during the comparative periods are attributable to professional and consulting expenses and employee expenses directly related to the Company's Acquisition Program. Loss on disposal of videocassette rental inventory decreased approximately $52,000 and $24,000, respectively, during the comparative periods due to re- merchandising the Company's stores in conjunction with the Company's Acquisition Program and to longer retention of rental inventory before disposition. -16- Professional fee and consulting expenses increased approximately $7,000 during the three-month comparative period. The increase is related to legal fee costs associated with operating the Company's stores. During the six-month comparative period, professional fee and consulting expenses decreased approximately $9,000. The gain on settlement of debt of $396,000 during the six-month period ended June 30, 1995 is primarily attributable to the discounted cash settlement of approximately $1,006,000 of debt (see Note 4 to the accompanying financial statements). As a result of the foregoing, the Company incurred net losses of approximately $981,000 and $1,558,000 during the three-month and six-month periods ended June 30, 1995, respectively. -17- PART II - OTHER INFORMATION - - --------------------------- 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 June 5, 1995. Such report included disclosure under Item 5 of the Company's signing of definitive agreements for the acquisition of JD Store Equipment, Inc., VA Entertainment Corp., and Palmer Corporation. -18- SIGNATURES ---------- In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CHOICES ENTERTAINMENT CORPORATION Date: August 11, 1995 By: /s/ John A. Boylan --------------------------------- John A. Boylan Chief Executive Officer Date: August 11, 1995 By: /s/ Ronald W. Martignoni --------------------------------- Ronald W. Martignoni Chief Financial Officer -19- INDEX TO EXHIBITS Exhibit No. Description of Exhibit - - ------- ---------------------- 3(a) Certificate of Incorporation, as amended (1) (b) By-Laws, as amended (2) 4 Form of certificate evidencing shares of Common Stock (3) 10(a) Agreement and Plan of Reorganization and Merger By and Between Choices Entertainment Corporation and Palmer Corporation dated June 5, 1995, as amended (4) (b) Agreement and Plan of Reorganization and Merger By and Between Choices Entertainment Corporation and VA Entertainment Corp. dated June 15, 1995, as amended (4) (c) Agreement and Plan of Reorganization and Merger By and Between Choices Entertainment Corporation and JD Store Equipment, Inc. dated July 19, 1995, as amended (4) 27(a) Financial Data Schedule (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 1992 Annual Report on Form 10-K and incorporated herein by reference. (3) 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. (4) Filed as an Exhibit to Registrant's report on Form 8-K dated June 5, 1995. (5) Filed herewith. EX-27 2 FINANCIAL DATA SCHEDULE
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. 6-MOS DEC-31-1995 JUN-30-1995 34,042 0 926 0 195,418 296,946 5,522,785 4,381,875 1,941,009 2,162,943 0 219,604 0 0 (641,538) 1,941,009 2,367,163 2,367,163 430,049 430,049 3,489,085 0 6,103 0 0 0 0 0 0 (1,558,074) (0.07) (0.07)
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