-----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, AiXMYsH1/jD6MI6ho/cElcDoZDA4lgJXciVV8B0mHh3AsVQWhsYGua09h+pf0+I2 1jZuYvxLpgQgA44quszebg== 0000950130-95-002438.txt : 19980423 0000950130-95-002438.hdr.sgml : 19980423 ACCESSION NUMBER: 0000950130-95-002438 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19950930 FILED AS OF DATE: 19951114 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: 95591832 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 September 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) 220 Continental Drive, Suite 102, Newark, Delaware 19713 - - - -------------------------------------------------- -------------- (Address of Principal Executive Offices) (Zip Code) Issuer's Telephone Number, Including Area Code (302) 366-8684 -------------- 81 Big Oak Road, Suite 205, Morrisville, PA 19067 ----------------------------------------------------------------- (Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report) Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- State the number of shares outstanding of the issuer's Common Stock, as of November 10, 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
September 30, December 31, 1995 1994 ------------ ----------- (Unaudited) (Audited) ASSETS - - - ------ Current assets: Cash........................................ $ 123,809 $ 129,389 Accounts receivable......................... 597 1,439 Merchandise inventories..................... 201,443 425,357 Prepaid expenses............................ 50,034 24,112 ------------ ------------ Total current assets....................... 375,883 580,297 Videocassette rental inventory, net.......... 833,022 841,966 Equipment, net (Note 2)...................... 226,158 346,956 Intangible assets, net....................... 193,653 206,282 Other deferred costs......................... 238,750 Other assets................................. 71,734 68,227 ------------ ------------ $ 1,700,450 $ 2,282,478 ============ ============ LIABILITIES AND STOCKHOLDERS' DEFICIT - - - ------------------------------------- Current liabilities: Notes payable............................... $ 180,061 $ 480,362 Accounts payable............................ 394,227 779,659 Accrued merger and acquisition.............. expenses (Note 4).......................... 689,614 119,054 Accrued professional fees................... 87,720 745,374 Accrual for lease cancellation and litigation reserves........................ 17,500 103,486 Accrued salaries............................ 71,610 58,670 Other accrued expenses...................... 80,261 98,920 ------------ ------------ Total current liabilities.................. 1,520,993 2,385,525 Other liabilities (Note 5)................... 680,000 200,000 Other accrued expenses....................... 138,750 ------------ ------------ Total liabilities.......................... 2,200,993 2,724,275 ------------ ------------ Stockholders' deficit: Preferred stock, par value $.01 per share: authorized 5,000 shares; 34 shares issued and outstanding in 1995 and no shares issued or outstanding in 1994 (Note 5)..... Common stock, par value $.01 per share: authorized 50,000,000 shares; issued and outstanding 21,964,395 shares in 1995 and 18,654,934 in 1994................ 219,644 186,549 Additional paid-in capital.................. 20,394,803 18,631,441 Accumulated deficit......................... (21,114,990) (19,259,787) ------------ ------------ Total stockholders' deficit................ (500,543) (441,797) ------------ ------------ $ 1,700,450 $ 2,282,478 ============ ============
See accompanying notes to financial statements. -2- CHOICES ENTERTAINMENT CORPORATION STATEMENTS OF LOSS (Unaudited)
For the Three Months For the Nine Months Ended September 30, Ended September 30, ------------------------ ------------------------- 1995 1994 1995 1994 ----------- ----------- ------------ ----------- Revenues: Movie rentals..................... $1,030,926 $1,095,267 $ 2,956,259 $3,233,382 Merchandise sales................. 171,842 346,160 613,672 1,173,523 ---------- ---------- ----------- ---------- 1,202,768 1,441,427 3,569,931 4,406,905 ---------- ---------- ----------- --------- Operating costs and expenses: Cost of goods sold................ 185,063 296,213 615,113 975,813 Cost of movie rentals 605 16,686 8,315 107,906 Store payroll..................... 261,719 276,662 799,728 858,242 Store rents....................... 226,730 236,770 713,142 693,800 Other store operating expenses......................... 122,320 99,035 343,765 337,864 Selling and administrative expenses......................... 209,185 224,740 659,405 581,218 Merger and acquisition expenses (Note 4)................ 270,180 1,648,995 Professional and consulting expenses......................... 55,175 105,274 169,465 228,751 Loss on disposal of video- cassette rental inventory........ 28,466 (68) 108,178 104,688 Store closing, lease termination and litigation provisions........ 17,888 21,607 Depreciation and amortization..... 134,047 313,926 742,158 930,309 ---------- ---------- ----------- ---------- 1,493,490 1,587,126 5,808,264 4,840,198 ---------- ---------- ----------- --------- Other income (expenses): Gain on settlement of debt (Note 4)......................... 395,640 Interest expense, net............. (6,407) (4,872) (12,510) (17,486) ---------- ---------- ----------- ---------- (6,407) (4,872) 383,130 (17,486) ---------- ---------- ----------- ---------- Net loss.......................... $ (297,129) $ (150,571) $(1,855,203) $ (450,779) ========== ========== =========== ========== Net loss per share of common stock (Note 3)................... $(0.01) $(0.01) $(0.09) $(0.02) ========== ========== =========== ==========
See accompanying notes to financial statements. -3- CHOICES ENTERTAINMENT CORPORATION STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1994 AND 1995 (UNAUDITED)
Preferred Stock Common Stock Additional --------- ------------ Paid-In Accumulated Shares 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 Issuance of Common Stock upon exercise of a stock option 5,000 50 1,100 1,150 Net Loss for the nine months ended September 30, 1994 (450,779) (450,779) ---------- -------- ----------- ------------ ----------- Balance at September 30, 1994 18,483,934 $184,839 $18,566,654 $(18,722,427) $ 29,066 ========== ======== =========== ============ =========== 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 2,146,000 21,460 875,095 896,555 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 Issuance of Preferred Stock to private investors, net of related costs (Note 5) 34 217,600 217,600 Net Loss for the nine months ended September 30, 1995 (1,855,203) (1,855,203) -- ---------- -------- ---------- ------------ ----------- Balance at September 30, 1995 34 21,964,395 $219,644 $20,394,803 $(21,114,990) $( 500,543) == ========== ======== =========== ============ ===========
See accompanying notes to financial statements. -4- CHOICES ENTERTAINMENT CORPORATION STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Nine Months Ended September 30, --------------------------- 1995 1994 -------------- ----------- Cash flows from operating activities: Net loss............................................ $(1,855,203) $ (450,779) ----------- ---------- Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation and amortization.................... 742,158 930,309 Gain on settlement of debt....................... (395,640) Cost of rental films sold........................... 237,068 154,370 Loss on disposal of rental films.................... 108,178 104,688 Amortization and write-off of other deferred costs, net.......................................... 38,750 Change in assets and liabilities: Decrease in accounts receivable................ 842 15,326 Decrease in merchandise inventories............ 223,914 52,038 Increase in prepaid expenses................... (25,922) (10,614) (Increase) decrease in other assets............ (3,507) 17,999 Increase (decrease) in accounts payable........ (272,931) 82,842 Increase in accrued merger and acquisition expenses......................... 570,560 Increase (decrease) in accrued professional fees............................ (374,497) 73,552 Increase in accrued salaries................... 12,940 995 Decrease in accrual for lease cancellation and litigation reserves...................... (10,000) (77,056) Decrease in other accrued expenses............. (18,659) (27,583) ----------- ---------- Total adjustments................................... 833,254 1,316,866 ----------- ---------- Net cash provided by (used in) operating activities........................................ (1,021,948) 866,087 ----------- ---------- Cash flows from investing activities: Purchase of equipment, net........................ (76,662) Purchase of videocassette rental films............ (944,376) (923,975) ----------- ---------- Net cash used in investing activities............... (1,021,038) (923,975) ----------- ---------- Cash flows from financing activities: Proceeds from issuance of common stock........... 1,292,607 1,150 Proceeds from private offering of preferred stock, net..................................... 897,600 Proceeds from notes payable...................... 80,000 Repayment of notes payable....................... (152,801) (45,996) ----------- ---------- Net cash provided by financing activities........... 2,037,406 35,154 ----------- ---------- Net decrease in cash................................ (5,580) ( 22,734) Cash at beginning of period......................... 129,389 185,125 ----------- ---------- Cash at end of period............................... $ 123,809 $ 162,391 =========== ========== Supplementary disclosure of cash flow information: Cash paid during the year for interest........... $ -0- $ -0- =========== ========== 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 nine-month periods ended September 30, 1995 and 1994, and as of September 30, 1995, is 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 nine-month periods ended September 30, 1995, are not necessarily indicative of the results to be expected for the full year. Note 2 - Equipment - - - ------------------ Equipment at September 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 nine-month periods ended September 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 Nine Months Ended September 30, September 30, ---------------------- ---------------------- 1995 1994 1995 1994 ---------- ---------- ---------- ---------- Number of shares used in calculations 21,963,000 18,479,000 21,542,000 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 $21,114,990 from inception to September 30, 1995, including a net loss of $1,855,203 for the nine-month period ended September 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 September 30, 1995, the Company had a net working capital deficiency of approximately $1,145,000. The Company is currently funding its business on a day-to-day basis from revenues generated from its 11 store operations. However, as the revenues from the Company's existing 11 stores are insufficient, the Company is operating on a negative cash flow basis and is in immediate need of financing to fund its short-term working capital needs. In that regard, the Company is presently in default on three 10% promissory notes totalling $180,000 plus accrued interest. Furthermore, although the Company has negotiated equity and discounted cash settlements during the year 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, the Company's viability is and will continue to be dependent upon its ability to secure needed capital or extend the due dates of liabilities for the foreseeable future. The Company, as previously reported, made a private offering of units consisting of preferred stock, promissory notes, and warrants to purchase preferred stock, which offering terminated in accordance with its terms on September 30, 1995 (see Note 5). The terms of the private offering provided for gross maximum and minimum proceeds of approximately $4,020,000 and $1,020,000, respectively. As previously reported, the Company had raised and drawn down $1,020,000, the minimum amount under the offering. No additional amounts were raised prior to the termination of the offering and all amounts raised were used to satisfy certain existing obligations of the Company. However, as noted above, the Company remains in a severely distressed financial condition and is in immediate need of financing to fund its short-term working capital needs. As previously reported, during September 1995, the merger agreements between the Company and JD Store Equipment, Inc., VA Entertainment Corp., d/b/a Video Junction, and Palmer Corporation, were terminated. In addition, all previously announced letters of intent with other acquisition candidates have expired. Although the Company is no longer pursuing an acquisition program, and certain executive officers brought in in connection with the acquisition program have resigned, the Company is exploring a possible merger with one or more companies. However, there is no assurance the Company's efforts will be successful in connection with any potential merger. In -7- CHOICES ENTERTAINMENT CORPORATION NOTES TO FINANCIAL STATEMENTS - CONTINUED (UNAUDITED) Note 4 - Liquidity (Continued) - - - ------------------------------ the event the Company is not successful in pursuing a potential merger, 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. The Company may also explore the possibility of selling its video stores, although no assurance can be given that it would be successful in that regard. Note 5 - Private Placement - - - -------------------------- The Company, in connection with a private offering of units of preferred stock, promissory notes and warrants to purchase preferred stock, which terminated in September 1995, issued a total of: (i) 34 shares of the Company's Series C Convertible Preferred Stock ("Preferred Stock"), convertible (subject to shareholder approval as provided below) into 1,360,000 shares of common stock, (ii) 5% unsecured promissory notes in the aggregate principal amount of $680,000 due in September 1997, with interest payable annually in cash or, at the election of the Company, in shares of Preferred Stock (valued at $.25 per share), and with principal and any accrued but unpaid interest convertible into Preferred Stock (valued at $.25 per share) at the sole option of the holder in the event the Company defaults in the payment of principal or is otherwise in default, and (iii) three-year warrants to purchase 10.2 shares of Preferred Stock at an exercise price of $10,000 per share, convertible (subject to shareholder approval as provided below) into a total of 408,000 shares of common stock. Additionally, the Company paid a placement fee consisting of $122,400 and five-year warrants to purchase 5.1 shares of Preferred Stock at an exercise price of $10,000 per share and a finder's fee consisting of five-year warrants to purchase 8.5 shares of Preferred Stock at an exercise price of $37,500 per share, all of which Preferred Stock being convertible (subject to shareholder approval as provided below) into an aggregate of 544,000 shares of common stock. Each share of Preferred Stock will become convertible, at the option of the holder thereof, into 40,000 shares of the Company's common stock, subject to adjustment, only after receipt of 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 (as provided by the terms of the Preferred Stock). However, as the conversion of the Preferred Stock is contingent upon stockholder approval of -8- CHOICES ENTERTAINMENT CORPORATION NOTES TO FINANCIAL STATEMENTS - CONTINUED (UNAUDITED) Note 5 - Private Placement (Continued) - - - -------------------------------------- the increase in authorized common stock, no assurances can be given that the Preferred Stock will become convertible. Holders of the 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 Preferred Stock entitled to 40,000 votes. Holders of Preferred Stock have no liquidation or other preferences upon the liquidation, dissolution, or winding up of the Company, and are entitled to certain piggyback and demand registration rights for the shares of common stock into which the Preferred Stock may be converted. Note 6 - Common Stock and Stock Options - - - --------------------------------------- Between January 1, 1995 and September 30, 1995, the Company issued 3,309,461 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. 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. Additionally, options to purchase 2,200,000 shares of the Company's common stock expired by their terms upon the resignation of four officers of the Company during September 1995. On September 27, 1995, the Company granted options, under the Stock Option and Appreciation Rights Plan of 1987, to purchase 457,000 shares of the Company's common stock to various employees of the Company, and a non-qualified option to purchase 100,000 shares of the Company's common stock to a director of the Company, at an exercise price of $.19 per share, the average fair market value on that date. -9- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES The Company is currently operating in a severely distressed financial condition. As of September 30, 1995, the Company had a net working capital deficiency of approximately $1,145,000. The Company is currently funding its business on a day-to-day basis from revenues generated from its 11 store operations. However, as the revenues from the Company's existing 11 stores are insufficient, the Company is operating on a negative cash flow basis and is in immediate need of financing to fund its short-term working capital needs. In that regard, the Company is presently in default on three 10% promissory notes totalling $180,000 plus accrued interest. Furthermore, although the Company has negotiated equity and discounted cash settlements during the year 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, the Company's viability is and will continue to be dependent upon its ability to secure needed capital or extend the due dates of liabilities for the foreseeable future. The Company, as previously reported, made a private offering of units consisting of preferred stock, promissory notes, and warrants to purchase preferred stock, which offering terminated in accordance with its terms on September 30, 1995 (see Note 5 to the Financial Statements). The terms of the private offering provided for gross maximum and minimum proceeds of approximately $4,020,000 and $1,020,000, respectively. As previously reported, the Company had raised and drawn down $1,020,000, the minimum amount under the offering, and issued 34 shares of the Company's preferred stock and other securities. No additional amounts were raised prior to the termination of the offering and all amounts raised were used to satisfy certain existing obligations of the Company. However, as noted above, the Company remains in a severely distressed financial condition and is in immediate need of financing to fund its short-term working capital needs. As previously reported, during September 1995, the merger agreements between the Company and JD Store Equipment, Inc., VA Entertainment Corp., d/b/a Video Junction, and Palmer Corporation, were terminated. In addition, all previously announced letters of intent with other acquisition candidates have expired. Although the Company is no longer pursuing an acquisition program, and certain executive officers brought in in connection with the acquisition program have resigned, the Company is exploring a possible merger with one or more companies. However, there is no assurance the Company's efforts -10- will be successful in connection with any potential acquisition or merger. In the event the Company is not successful in pursuing any potential acquisition or merger, 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. The Company may also explore the possibility of selling its video stores, although no assurance can be given that it would be successful in that regard. CAPITAL EXPENDITURES During the nine-month period ended September 30, 1995, the Company's capital expenditures were approximately $944,000 and $77,000 relating to the purchase of videocassette rental films and the purchase of fixtures for use in its video stores, respectively, compared to $924,000 for videocassette rental films purchased during the same period in 1994. The Company does not anticipate any significant capital expenditures for the remainder of the current year other than the replenishment of videocassette rental films through the normal course of business. MATERIAL CHANGES IN FINANCIAL CONDITION Assets: Total assets decreased by approximately $582,000 between December 31, 1994 and September 30, 1995 primarily due to the net decrease in inventories due to the elimination of the sale of music product in the Company's stores and to the write-off of certain deferred costs which related to the Company's previously reported merger and acquisition program. Liabilities: Total liabilities decreased by approximately $523,000 between December 31, 1994 and September 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 previously reported acquisition program, accrued merger and acquisition expenses increased approximately $571,000. 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 settlement of obligations under a consulting agreement. Stockholders' Deficit: Between December 31, 1994 and September 30, 1995, the net increase in Stockholders' Deficit of $59,000 was due to the loss during the period of approximately $1,855,000, which was offset -11- by the issuance of 2,146,000 shares of common stock in connection with various stock option and warrant exercises, the issuance in a private placement of 900,000 shares of common stock to two foreign investors, the issuance of 113,461 shares of common stock in settlement of a debt obligation, the issuance of 150,000 shares of common stock to a consulting firm, and, as noted above, the issuance of 34 shares of the Company's Preferred Stock in connection with a private offering of such stock and other securities. Net proceeds from the issuance of the common stock and the Preferred Stock were approximately $1,291,000 and $217,600, respectively. MATERIAL CHANGES IN RESULTS OF OPERATIONS Following are the results of operations for the three-month and nine- month periods ended September 30, 1995 and 1994: Revenues decreased by approximately $239,000 and $837,000 during the three-month and nine-month periods ended September 30, 1995, respectively. Approximately $174,000 and $560,000, 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 nine-month period is related to the closing of one of the Company's stores during March 1994, with the balance of the decreases during the two periods primarily due to weather factors, increased industry competition and fewer highly-rented titles released during the period ended September 30, 1995. Cost of goods sold decreased approximately $111,000 and $361,000 but increased approximately 22% and 17% as a percentage of revenue during the three- month and nine-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 and to the sale of previously viewed rental films at less than carrying value to provide additional cash flow for operations. Operating expenses, which include store payroll, rents and other operating expenses, decreased approximately $2,000 and $33,000, 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 decreased approximately $14,000 and increased $78,000, respectively, during the comparative periods. The increase in expenses related to the support of the Company's previously reported merger and acquisition program. -12- Merger and acquisition expenses of approximately $270,000 and $1,649,000 during the comparative periods are attributable to professional and consulting expenses and employee expenses directly related to the Company's previously reported merger and acquisition program. (See Note 4 to the Financial Statements.) Loss on disposal of videocassette rental inventory increased approximately $28,000 and $4,000, respectively, during the comparative periods due to re-merchandising the Company's stores. Professional fee and consulting expenses, unrelated to the previously reported merger and acquisition program, decreased approximately $50,000 and $60,000 during the three-month and nine-month comparative periods, respectively. The decreases are primarily related to the Company's continuing efforts to reduce costs. Depreciation and amortization expenses decreased approximately $180,000 and $188,000, respectively, during the comparative periods, primarily due to the quantity of videocassette rental films depreciated down to their salvage value during the periods ended 1994. In addition, approximately $75,000 of the decrease during both periods is primarily due to the reversal of excess depreciation taken on certain fixed assets in prior periods. The gain on settlement of debt of $396,000 during the nine-month period ended September 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 $297,000 and $1,855,000 during the three-month and nine-month periods ended September 30, 1995, respectively. -13- 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 September 11, 1995. Such report included disclosure under Item 5 of the termination of merger agreements between the Company and JD Store Equipment, Inc., VA Entertainment Corp. d/b/a Video Junction, and Palmer Corporation. -14- 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 10, 1995 By: /s/ Ronald W. Martignoni --------------------------------- Ronald W. Martignoni Chief Executive Officer Date: November 10, 1995 By: /s/ Lorraine E. Cannon --------------------------------- Lorraine E. Cannon Chief Financial Officer -15- 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) 27(a) Financial Data Schedule (2) - - - ----------------- (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 herewith. (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. EX-3.(B) 2 AMEND. NO.1 CERT OF DESIG. SERIES C PERFER. STOCK Exhibit 3(b) AMENDMENT NO. 1 TO CERTIFICATE OF DESIGNATIONS OF SERIES C PREFERRED STOCK OF CHOICES ENTERTAINMENT CORPORATION Pursuant to Section 151 of the General Corporation Law of the State of Delaware CHOICES ENTERTAINMENT CORPORATION, a corporation organized and existing under the General Corporation Law of the State of Delaware (the "Corporation"), hereby certifies that, pursuant to (i) the authority conferred upon the Board of Directors by the Certificate of Incorporation of the Corporation, (ii) the provisions of Section 151 of said General Corporation Law, and (iii) the resolutions adopted by the Board of Directors of the Corporation by unanimous written consent dated August 11, 1995, the Board of Directors duly adopted resolutions providing for the amendment of the Certificate of Designations of Series C Preferred Stock of the Corporation to increase from 300 to 500 the number of shares designated for issuance as Series C Preferred Stock (none of which have been issued to date), and increasing from 25,000 to 40,000 the number of votes to which each share of Series C Preferred Stock is entitled and the number of shares of Common Stock into which each share of Series C Preferred Stock may become convertible (and making similar conforming changes), which resolutions are as follows: RESOLVED, that pursuant to the authority vested in the Board of Directors of the Corporation by the Certificate of Incorporation, the Board of Directors does hereby approve the issuance up to 500 shares of Preferred Stock, par value $.01 per share, of the Corporation, to be designated "Series C Preferred Stock" of the presently authorized shares of Preferred Stock. The voting powers, designations, preferences, and other rights of the Series C Preferred Stock authorized hereunder and the qualifications, limitations and restrictions of such preferences and rights are as follows: 1. Cash Dividends. Cash dividends shall be paid with respect to -------------- the shares of Series C Preferred Stock on the same basis as dividends are paid to holders of common stock of the Corporation (the "Common Stock"), and shall be distributed ratably to holders of the Series C Preferred Stock and holders of Common Stock on the basis that each 1/40,000 share of Series C Preferred Stock shall be pro rata with each whole share of Common Stock. 2. Voting. The holders of Series C Preferred Stock shall be ------ entitled to vote on any matter required to be or otherwise submitted to a vote of stockholders of the Corporation together with the Common Stock and not as a separate class, unless otherwise required by law. Each share of Series C Preferred Stock shall be entitled to 40,000 votes. 3. Conversion. The Series C Preferred Stock shall not be ---------- convertible when issued, but shall automatically become convertible into shares of Common Stock (at the rate of 40,000 shares of Common Stock for every one share of Series C Preferred Stock (the "Conversion Rate")) upon the filing of an amendment to the Corporation's Certificate of Incorporation (the "Amendment") which increases the number of authorized shares of Common Stock by a number equal to or greater than the sum of (i) 40,000 multiplied by the number of then outstanding shares of Series C Preferred Stock, plus (ii) that number of additional shares of Common Stock, if any, needed to be reserved for issuance upon the conversion or exercise of all other then outstanding convertible or exercisable securities of the Corporation. Upon filing of the Amendment, the number of shares approved for issuance as Series C Preferred Stock shall automatically be decreased from 500 to a number equaling the number of then outstanding shares of Series C Preferred Stock (thus preventing the issuance of any additional shares of Series C Preferred Stock). The following provisions shall apply after the Series C Preferred Stock becomes convertible: (a) Any holder of shares of Series C Preferred Stock electing to convert such shares into Common Stock shall surrender the certificate or certificates for such shares at the office of the Corporation (or at such other place as the Corporation may designate by notice to the holders of shares of Series C Preferred Stock) during regular business hours, duly endorsed to the Corporation or in blank, or accompanied by instruments of transfer to the Corporation in blank, in form satisfactory to the Corporation and shall give written notice to the Corporation at such office that such holder elects to convert such shares of Series C Preferred Stock. The Corporation shall, as soon as practicable after such deposit of certificates for shares of Series C Preferred Stock, accompanied by the written notice above prescribed, issue and deliver at such office to the holder for whose account such shares were surrendered, or to his nominee, certificates representing the number of shares of Common Stock to which such holder is entitled upon such conversion. (b) Conversion shall be deemed to have been made as of the date of surrender of certificates for the shares of Series C Preferred Stock to be converted and the delivery of written notice as hereinabove provided; and the person entitled to receive the Common Stock issuable upon such conversion shall be treated for all purposes as the record holder of such Common Stock on such date. (c) The Conversion Rate shall be adjusted from time to time as follows: 2 i) In case the Corporation shall (A) subdivide its outstanding shares of Common Stock, (B) combine its outstanding shares of Common Stock into a smaller number of shares or, (C) issue by reclassification of its shares of Common Stock any shares of capital stock of the Corporation, the conversion right and each Conversion Rate in effect immediately prior to such action shall be adjusted so that the holder of any shares of the Series C Preferred Stock thereafter surrendered for conversion shall be entitled to receive the number of shares of capital stock of the Corporation which such holder would have owned immediately following such action had such shares of the Series C Preferred Stock been converted immediately prior thereto. An adjustment made pursuant to this subparagraph shall become effective retroactively immediately after the record date in the case of a dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision, combination or reclassification. If, as a result of an adjustment made pursuant to this subparagraph, the holder of any shares of the Series C Preferred Stock thereafter surrendered for conversion shall become entitled to receive shares of two or more classes of capital stock of the Corporation, the Board of Directors (whose determination shall be conclusive) shall determine the allocation of the adjusted Conversion Rate between or among shares of such classes of capital stock. ii) Notwithstanding the foregoing, the Corporation shall not be required to make any adjustment of the Conversion Rate unless such adjustment would require an increase or decrease of at least 5% in such rate. Any lesser adjustment shall be carried forward and shall be made at the time of and together with the next subsequent adjustment which, together with any adjustment or adjustments so carried forward, shall amount to an increase or decrease of at least 5% in such rate. iii) Whenever an adjustment in the Conversion Rate is required, the Corporation shall forthwith place on file with its Secretary a statement signed by its Chairman of the Board, President or a Vice President and by its Secretary or Treasurer or one of its Assistant Secretaries or Assistant Treasurers, stating the adjusted Conversion Rate determined as provided herein. Such statement shall set forth in reasonable detail such facts as shall be necessary to show the reason and the manner of computing such adjustment. Promptly after the adjustment of the Conversion Rate, the Corporation shall mail a notice thereof to each holder of shares of Series C Preferred Stock. iv) In case of either (A) any consolidation or merger to which the Corporation is a party, other than a merger or consolidation in which the Corporation is the surviving or continuing corporation and which does not result in any reclassification of, or change (other than a change in par value or from par value to no par value or from no par value to par value, or as a result of a subdivision or combination) in, outstanding shares of Common Stock, or (B) any sale or conveyance to another corporation of all or substantially all of the assets of the Corporation, then the Corporation, or such successor corporation, as the case may be, shall make appropriate provision so that the holder of each share of Series C Preferred Stock then outstanding 3 shall have the right to convert such shares of Series C Preferred Stock into the kind and amount of shares or other securities and property receivable upon such consolidation, merger, sale or conveyance by a holder of the number of shares of Common Stock into which such shares of Series C Preferred Stock might have been converted immediately prior to such consolidation, merger, sale or conveyance, subject to adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for hereunder. The provisions of this subparagraph shall apply similarly to successive consolidations, mergers, sales or conveyances. v) The Corporation shall take all necessary action to cause any shares of Series C Preferred Stock which shall at any time have been converted to resume the status of authorized but unissued shares of Preferred Stock, without designation as to series, until such shares are once more designated as part of a particular series by the Board of Directors. At the time when the Series C Preferred Stock first becomes convertible, and at all times thereafter, the Corporation shall reserve and keep available out of its authorized but unissued stock, for the purpose of effecting the conversion of the shares of the Series C Preferred Stock, such number of its duly authorized shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of the Series C Preferred Stock; provided, however, that nothing contained herein shall preclude the Corporation from satisfying its obligations in respect of the conversion of the shares by delivery of purchased shares of Common Stock which are held in the treasury of the Corporation. vi) The Corporation shall pay any and all issue or transfer taxes that may be payable in respect of any issuance or delivery of shares of Common Stock on conversion of shares of Series C Preferred Stock pursuant hereto. The Corporation shall not, however, be required to pay any tax which is payable in respect of any transfer involved in the issue or delivery of Common Stock in a name other than that in which the shares of Series C Preferred Stock so converted were registered, and no such issue or delivery shall be made unless and until the person requesting such issue has paid to the Corporation the amount of such tax, or has established, to the satisfaction of the Corporation, that such tax has been paid. vii) Before taking any action that would result in the effective price of the shares of Common Stock issuable upon conversion of Series C Preferred Stock being less than the then par value of the Common Stock, the Corporation shall take any corporate action which may, in the opinion of its counsel, be necessary in order that the Corporation may validly and legally issue fully paid and nonassessable shares of Common Stock. 4. Fractional Shares. The Series C Preferred Stock may be ----------------- issued as fractional shares in increments of 1/40,000 of a share. Each fractional share of Series C Preferred Stock shall be entitled to the same rights and powers on a pro rata basis as a whole share of Series C Preferred Stock. 4 5. Liquidation, Dissolution, Winding Up. The Series C Preferred ------------------------------------ Stock shall have no liquidation or other preference over the Corporation's Common Stock. Upon the voluntary or involuntary liquidation, dissolution or winding up of the Corporation, its net assets shall be distributed ratably to holders of the Series C Preferred Stock and holders of Common Stock on the basis that each 1/40,000 share of Series C Preferred Stock shall be pro rata with each whole share of Common Stock. IN WITNESS WHEREOF, CHOICES ENTERTAINMENT CORPORATION, has caused this Certificate to be signed by ______________, its ____________, and attested by ______________, its Secretary, this ___ day of ____________, 1995. CHOICES ENTERTAINMENT CORPORATION By: /s/ Ronald W. Martignoni ------------------------ Ronald W. Martignoni, CFO ATTEST: By: ____________________________ _________________, Secretary 5 EX-4.(B) 3 PROMISSORY NOTE Exhibit 4(b) THIS NOTE AND THE SHARES INTO WHICH THIS NOTE IS CONVERTIBLE (THE "SHARES") HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. NEITHER THE NOTE NOR THE SHARES MAY BE SOLD OR OTHERWISE TRANSFERRED UNDER SAID ACT, WITHOUT REGISTRATION OR UPON RECEIPT BY PAYOR OF AN OPINION OF LEGAL COUNSEL OR A COPY OF A LETTER FROM THE STAFF OF THE SECURITIES AND EXCHANGE COMMISSION, IN EITHER CASE SATISFACTORY TO PAYOR THAT SUCH NOTE OR THE SHARES MAY LEGALLY BE SOLD OR TRANSFERRED WITHOUT SUCH REGISTRATION. PROMISSORY NOTE --------------- $___________________ ____________________, 1995 FOR VALUE RECEIVED, the undersigned, Choices Entertainment Corporation ("Payor"), hereby promises to pay to the order of the undersigned ("Holder") the principal sum of $_________, with interest from the date hereof on unpaid principal at the rate of Five Percent (5%) per year, principal due and payable Twenty-Five (25) Months from the date hereof and interest payable annually. At the option of the Payor, any or all accrued interest may be paid, when due, in shares of Payor's $.01 par value Series C Preferred Stock (the "Preferred Stock"), valued at Twenty-Five Cents ($0.25) per share of Common Stock. Subject to the approval of the Payor's stockholders, each share of the Preferred Stock may become convertible into 40,000 shares of Common Stock. This Note may not be modified without the written consent of the parties hereto. (a) DEFAULT. At the option of the Holder hereof, this Note shall be immediately convertible without notice or demand, upon the occurrence at any time of any of the following events: 1. Assignment for the Benefit of Creditors. An assignment for the benefit --------------------------------------- of creditors by any party liable hereon, whether as maker, endorser, guarantor, surety or otherwise; 2. Bankruptcy. The commencement of proceedings in bankruptcy, or for the ---------- reorganization of any party liable hereon, whether as maker, endorser, guarantor, surety or otherwise, or for the readjustment of any of the debts of any of the foregoing parties, under the Federal Bankruptcy Code, as amended, or any part thereof, or under any other laws, whether state or federal, for the relief of debtors, now or hereafter existing, by any of the foregoing parties, or against any of the foregoing parties, which shall not be discharged within thirty (30) days of their commencement; 3. Appointment of Receiver. The appointment of a receiver, trustee or ----------------------- custodian for any party liable hereon, whether as maker, endorser, guarantor, surety or otherwise, or for any substantial part of the assets of any of the foregoing parties, or the institution of proceedings for the dissolution or the full or partial liquidation of any of the foregoing parties, and such receiver or trustee shall not be discharged within thirty (30) days of his or its appointment, or such proceedings shall not be discharged within thirty (30) days of their commencement, or the discontinuance of the business or the material change in the nature of the business of any of the foregoing parties; or 4. Dissolution. The dissolution of Payor. ----------- (b) PREPAYMENTS. Payor may, at any time and from time to time, without penalty, make prepayments which will be applied to the final payment of principal under this Note in the order or inverse order of maturity, all as the Holder may determine. (c) CONVERSION OF NOTE. If this Note is not paid when due, whether at maturity or by acceleration, the sole remedy of Holder shall be conversion of the Note. The principal balance of the Note and any accrued interest shall upon conversion be paid in shares of Preferred Stock as follows: the conversion shall be at $.25 per share of Common Stock. Holder shall have no right to convert unless there is a Default as defined in paragraph (a) above or if the Note is not paid when due. The right to convert may be exercised by presentation and surrender of this Note to Payor at its principal office, with the Election to Convert annexed hereto duly executed. Upon receipt by Payor at its office of this Note and the annexed Purchase Form in proper form for conversion as heretofore provided, the Holder shall be deemed to be the Holder of record of the Shares issuable upon such conversion, notwithstanding that the stock transfer books of Payor shall then be closed or that certificates representing such Shares shall not then be actually delivered to the Holder. If this Note is converted, the certificate or certificates representing the Shares to be issued upon conversion of the Note shall (except as provided herein) be imprinted with the following legend: THE SHARES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THE SHARES MAY NOT BE SOLD OR OTHERWISE TRANSFERRED UNDER SAID ACT, WITHOUT REGISTRATION OR UPON RECEIPT BY THE CORPORATION OF AN OPINION OF LEGAL COUNSEL OR A COPY OF A LETTER FROM THE STAFF OF THE SECURITIES AND EXCHANGE COMMISSION, IN EITHER CASE SATISFACTORY TO THE CORPORATION THAT SUCH NOTE OR THE SHARES MAY LEGALLY BE SOLD OR TRANSFERRED WITHOUT SUCH REGISTRATION. If Payor fails to fulfill its conversion obligations hereunder, Payor promises to pay Holder's costs of enforcement, which costs shall include, but shall not be limited to, reasonable attorneys' fees and court costs incurred by the Holder hereof on account of such collection. (d) RESERVATION OF SHARES. Payor hereby agrees that at all times there shall be authorized and reserved for issuance and/or delivery upon conversion of this Note such number of shares of Preferred Stock as shall be required for issuance and delivery upon conversion of this Note. 2 (e) RIGHTS OF THE HOLDER. Until such time, if any, as this Note is converted into Shares, the Holder shall not, by virtue hereof, be entitled to any rights of a shareholder in Payor, either at law or equity, and the rights of the Holder are limited to those expressed in this Note and are not enforceable against Payor except to the extent set forth herein. (f) ANTI-DILUTION PROVISIONS. The number of securities to be delivered to Holder upon the conversion of this Note (the "Conversion Ratio") shall be subject to adjustment from time to time upon the happening of certain events as follows. In case Payor shall, without receipt of consideration, (i) pay a dividend or make a distribution on its shares of Common Stock in shares of its own Common Stock, (ii) subdivide or reclassify its outstanding Common Stock in shares of Common Stock into a greater number of shares, or (iii) combine or reclassify its outstanding Common Stock into a smaller number of shares, the Conversion Ratio in effect at the time of the record date for such dividend or distribution or of the effective date of such subdivision, combination or reclassification shall be proportionately adjusted so that the Holder of this Note converted after such date shall be entitled to receive the aggregate number and kind of shares which, if this Note had been converted immediately prior to such date, Holder would have owned upon such conversion and been entitled to receive upon such dividend, subdivision, combination or reclassification. (g) WAIVER. No single or partial exercise of any power hereunder shall preclude the other or further exercise thereof or the exercise of any other power. No delay or omission on the part of the Holder hereof in exercising any right hereunder shall operate as a waiver of such right or of any other right under this Note. (h) CHOICE OF LAW. This Note shall be governed by the law of the State of Pennsylvania. CHOICES ENTERTAINMENT CORPORATION By:__________________________________ DO NOT DESTROY THIS ORIGINAL NOTE: When paid, said original Note must be surrendered to Payor for cancellation and retention. 3 ELECTION TO CONVERT Dated: ___________, 19__ To Choices Entertainment Corporation, Inc. ("CEC") The undersigned owner of this Note hereby irrevocably elects to convert the within Note to the extent of purchasing _________________ shares of Series C Preferred Stock of CEC and hereby acknowledges that, as a result of such conversion, the entire outstanding principal balance of the Note shall be deemed paid in full. - - - ------------- ---------------------------------- Dated Signature INSTRUCTIONS FOR REGISTRATION OF STOCK Name ----------------------------------------------------------- (Please typewrite or print in block letters) Address -------------------------------------------------------- -------------------------------------------------------- Tax Identification Number ---------------------------------------- 4 EX-27 4 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. 9-MOS DEC-31-1995 SEP-30-1995 123,809 0 597 0 201,443 375,883 5,366,035 4,306,848 1,700,450 1,520,993 0 219,644 0 0 (720,187) 1,700,450 3,569,931 3,569,931 615,113 615,113 4,401,871 0 12,510 0 0 0 0 0 0 (1,885,203) (0.02) (0.02)
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