-----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, G++lSaV636lAE1hiQRWln+TPVDRhq1tSydRSC/o2CqWLCFbvu8c4Ap4UzNHL84Lf +2Zz/6/YG45zjD5JOfhr5A== 0001047469-97-004292.txt : 19980423 0001047469-97-004292.hdr.sgml : 19980423 ACCESSION NUMBER: 0001047469-97-004292 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971113 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: 97715745 BUSINESS ADDRESS: STREET 1: 836 W TRENTON AVE STREET 2: STE 205 CITY: MORRISVILLE STATE: PA ZIP: 19067 BUSINESS PHONE: 2154281000 MAIL ADDRESS: STREET 1: 836 W TRENTON AVE CITY: MORRISVILLE STATE: PA ZIP: 19067 FORMER COMPANY: FORMER CONFORMED NAME: DATAVEND INC DATE OF NAME CHANGE: 19900401 10QSB 1 FORM 10QSB U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 _________________________ FORM 10-QSB (Mark One) /X/ Quarterly report under Section 13 or 15 (d) of the Securities Exchange Act of 1934 For the quarterly period ended September 30, 1997 / / Transition report under Section 13 or 15 (d) of the Exchange Act For the transition period from _____________ to _____________ Commission file number 0-17001 Choices Entertainment Corporation ________________________________________________________________________________ (Exact Name of Small Business Issuer as Specified in Its Charter) Delaware 52-1529536 _______________________________ _______________________________________ (State or Other Jurisdiction of (I.R.S. Employer Identification No.) Incorporation or Organization) 1930 E. Marlton Pike, Cherry Hill, New Jersey 08003 _____________________________________________ _________ (Address of Principal Executive Offices) (Zip code) Issuer's Telephone Number, Including Area Code (609) 751-4148 ______________ 836 W. Trenton Avenue, Morrisville, Pennsylvania 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 12, 1997: 22,004,395 Transitional Small Business Disclosure Format (check one): Yes ____ No __X__ Part I: FINANCIAL INFORMATION Item 1. Financial Statements CHOICES ENTERTAINMENT CORPORATION BALANCE SHEETS
SEPTEMBER 30, 1997 DECEMBER 31, 1996 ------------------ ----------------- (UNAUDITED) (AUDITED) ----------------- ASSETS Current assets: Cash..................................................................... $ 203,073 $ 66,739 Cash held in escrow (Notes 3 and 4)...................................... 162,000 Accounts receivable...................................................... 16,858 Prepaid expenses......................................................... 17,630 20,842 Other deferred costs..................................................... 1,077 30,453 ------------------ ----------------- Total current assets................................................... 400,638 118,034 Cash held in escrow (Notes 3 and 4)........................................ 81,000 Equipment, net............................................................. 3,873 Other assets............................................................... 675 7,400 Net assets of discontinued business (Note 4)............................... 1,054,425 ------------------ ----------------- $ 486,186 $ 1,179,859 ------------------ ----------------- ------------------ ----------------- LIABILITIES AND STOCKHOLDERS DEFICIT Current liabilities: Notes payable............................................................ $ 854,000 Accounts payable......................................................... $ 47,927 61,558 Accrued merger and acquisition expenses.................................. 353,799 425,299 Accrued professional fees................................................ 227,996 168,199 Accrual for lease cancellation and litigation reserves................... 1,250 Accrued salaries......................................................... 11,960 7,500 Other accrued expenses................................................... 10,800 80,307 Net liabilities of discontinued business (Note 4)........................ 908,293 ------------------ ----------------- Total current liabilities.............................................. 652,482 2,506,406 ------------------ ----------------- Stockholders deficit: Preferred stock, par value $.01 per share: Authorized 5,000 shares: 109 shares issued and outstanding in 1997 and 37.4 shares issued and outstanding in 1996.................................................... 1 Common stock, par value $.01 per share: Authorized 50,000,000 shares: issued and outstanding 22,004,395 shares in 1997 and 1996.............. 220,044 220,044 Additional paid-in-capital............................................... 21,236,035 20,519,203 Accumulated deficit...................................................... (21,622,376) (22,065,794) ------------------ ----------------- Total stockholders deficit............................................. (166,296) (1,326,547) ------------------ ----------------- $ 486,186 $ 1,179,859 ------------------ ----------------- ------------------ -----------------
See accompanying notes to financial statements. CHOICES ENTERTAINMENT CORPORATION STATEMENTS OF INCOME (LOSS) (UNAUDITED)
FOR THE THREE MONTHS FOR THE NINE MONTHS ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, ------------------------ ----------------------- 1997 1996 1997 1996 ----------- ----------- ---------- ----------- Operating costs and expenses: Selling and administrative expenses......................... $ 71,205 $ 46,960 $ 157,451 $ 122,194 Professional and consulting expenses........................ 214,332 57,050 340,773 156,575 Depreciation and amortization............................... 9,953 9,792 29,537 19,584 ----------- ----------- ---------- ----------- 295,490 113,802 527,761 298,353 ----------- ----------- ---------- ----------- Other expenses: Interest expense, net....................................... 2,591 9,591 37,081 37,297 ----------- ----------- ---------- ----------- Loss from continuing operations............................... (298,081) (123,393) (564,842) (335,650) ----------- ----------- ---------- ----------- Discontinued operations--Note 4 Loss from discontinued operations........................... (72,171) (303,785) (141,740) Gain on sale of discontinued operations, net of tax of $13,092................................................... 1,312,045 ----------- ----------- ---------- ----------- Gain (loss) from discontinued operations...................... (72,171) 1,008,260 (141,740) ----------- ----------- ---------- ----------- Net income (loss)............................................. $ (298,081) $ (195,564) $ 443,418 $ (477,390) ----------- ----------- ---------- ----------- ----------- ----------- ---------- ----------- Net income (loss) per share of common stock--Note 2: ----------- ----------- ---------- ----------- ----------- ----------- ---------- ----------- Primary income (loss) per share: Continuing operations....................................... $ (0.01) $ (0.01) $ (0.03) $ (0.02) ----------- ----------- ---------- ----------- ----------- ----------- ---------- ----------- Discontinued operations..................................... $ 0.00 $ (0.01) $ 0.05 $ (0.01) ----------- ----------- ---------- ----------- ----------- ----------- ---------- ----------- Fully diluted income (loss) per share: Continuing operations....................................... $ (0.01) $ (0.01) $ (0.02) $ (0.02) ----------- ----------- ---------- ----------- ----------- ----------- ---------- ----------- Discontinued operations..................................... $ 0.00 $ (0.01) $ 0.04 $ (0.01) ----------- ----------- ---------- ----------- ----------- ----------- ---------- -----------
See accompanying notes to financial statements. CHOICES ENTERTAINMENT CORPORATION STATEMENT OF STOCKHOLDERS DEFICIT FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED)
PREFERRED STOCK COMMON STOCK ADDITIONAL --------------- -------------------- PAID-IN ACCUMULATED SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT Total ------- ------- --------- --------- ----------- ------------ ----------- Balance at December 31, 1996................... 37 22,004,395 $ 220,044 $20,519,203 ($22,065,794) $(1,326,547) Issuance of preferred stock to preferred stock note holders in lieu of cash payment for interest due on notes and to the conversion of 5% promissory notes into preferred stock 72 $1 716,832 716,833 Net income for the nine months ended September 30, 1997..................................... 443,418 443,418 --- -------- ---------- --------- ----------- ------------- ----------- 109 $1 22,004,395 $ 220,044 $21,236,035 ($21,622,376) $ (166,296) --- -------- ---------- --------- ----------- ------------- ----------- --- -------- ---------- --------- ----------- ------------- ----------- See accompanying notes to financial statements.
CHOICES ENTERTAINMENT CORPORATION STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, ------------------------ 1997 1996 ----------- ----------- Cash flows from operating activities: Net income (loss).................................................................... $ 443,418 $ (477,390) ----------- ----------- Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization...................................................... 489,968 883,156 Gain on sale of assets, net of tax (Note 4)........................................ (1,312,045) Cost of rental films sold.......................................................... 121,342 326,222 Loss on disposal of rental films................................................... 83,621 193,145 Videocassette and inventory reserves............................................... 7,667 17,320 Change in assets and liabilities: Increase in cash held in escrow.................................................... (243,000) Increase in accounts receivable.................................................... (4,068) (21,923) (Increase) decrease in merchandise inventories..................................... 62,584 (30,758) (Increase) decrease in prepaid expenses............................................ 24,053 (32,087) Increase in other deferred costs................................................... 8,487 (204) Increase (decrease) in accounts payable............................................ (651,911) 265,810 Decrease in accrued merger and acquisition expenses................................ (50,550) (82,325) Increase (decrease) in accrued professional fees................................... (40,203) 25,468 Increase (decrease) in deferred revenue............................................ (27,797) 34,387 Increase (decrease) in accrued salaries............................................ (43,774) 18,656 Decrease in accrual for lease cancellation and litigation reserves................. (1,250) (11,250) Increase (decrease) in other accrued expenses...................................... (165,909) 145,344 ----------- ----------- Total adjustments.................................................................... (1,742,785) 1,730,961 ----------- ----------- Net cash provided by (used in) operating activities.................................. (1,299,367) 1,253,571 ----------- ----------- Cash flows from investing activities: Purchase of equipment, net......................................................... (10,049) (13,433) Purchase of videocassette rental films............................................. (620,807) (1,251,057) Net proceeds from sale of assets (Note 4).......................................... 2,411,507 ----------- ----------- Net cash provided by (used in) investing activities.................................. 1,780,651 (1,264,490) ----------- ----------- Cash flows from financing activities: Proceeds from notes payable........................................................ 49,000 Repayment of notes payable......................................................... (393,950) (8,530) ----------- ----------- Net cash used in financing activities................................................ (344,950) (8,530) ----------- ----------- Net increase (decrease) in cash...................................................... 136,334 (19,449) Cash at beginning of period.......................................................... 66,739 86,391 ----------- ----------- Cash at end of period................................................................ $ 203,073 $ 66,942 ----------- ----------- ----------- ----------- Supplementary disclosure of cash flow information: Cash paid during the year for interest............................................. $ 19,601 $ 10,055 ----------- ----------- ----------- -----------
See accompanying notes to financial statements. CHOICES ENTERTAINMENT CORPORATION NOTES TO FINANCIAL STATEMENTS (Unaudited) Note 1 - Basis of Presentation And Significant Accounting Policies The financial information included herein for the three- month and nine-month periods ended September 30, 1997 and 1996 and as of September 30,1997 are unaudited. In addition, the financial information does not include all disclosures required under generally accepted accounting principles because certain note information has been omitted; however, such information reflects all adjustments which are, in the opinion of management, necessary for a fair statement of the results of the interim periods and such adjustments are of a normal recurring nature. The results of operations for the nine-month period ended September 30, 1997 are not necessarily indicative of the results to be expected for the full year. Reclassification of the 1996 financial statements has been made to conform with the presentation of the 1997 financial statements. Note 2 - Net Income (Loss) Per Common Share Primary income per share for the nine-month period ended September 30, 1997 was computed by dividing the net income by the weighted average number of common shares outstanding during the periods. Primary and fully diluted loss per share for the three-month and nine-month periods ended September 30, 1996 and for the three-month period ended September 30, 1997 was computed by dividing the net loss by the weighted average number of common shares outstanding during the period. No consideration was given to the conversion of preferred stock since the result of that calculation would be anti-dilutive. Fully diluted income per share for the nine-month period ended September 30, 1997, was computed by dividing the net income by the weighted average number of common shares outstanding during the periods, as well as the number of common shares that would be outstanding as a result of the conversion of the Company's preferred stock. Three Months Ended Nine Months Ended September 30, September 30, ------------- ------------- 1997 1996 1997 1996 ---------- ---------- ---------- --------- Number of shares used in calculation Primary dilution 22,004,000 22,004,000 22,004,000 22,004,000 Full dilution 22,004,000 22,004,000 23,700,000 22,004,000
Note 3 - Liquidity As previously reported, on June 16, 1997, the Company sold substantially all of its assets and business to West Coast Entertainment Corporation, ("West Coast"). Notwithstanding the sale of its operating business, the Company's financial statements included herein have been presented on the basis that the Company is a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has incurred net losses, aggregating $21,622,376 from inception through September 30, 1997, including a net loss of $868,627 for the nine months ended September 30, 1997, before a net gain of $1,312,045 from the sale of substantially all of the Company's assets to West Coast ( the "West Coast Transaction") (see Note 4 ). As of September 30, 1997, the Company had a net working capital deficiency of approximately $252,000. The West Coast Transaction provided $2,430,000 in cash, of which $243,000 remains in escrow with West Coast, and $203,000 remained available to the Company at September 30, 1997, after the payment of liabilities and other expenses. The cash available at time of closing the West Coast Transaction was less than anticipated because of delays in the closing of the West Coast Transaction during which time the Company continued to operate at a loss. CHOICES ENTERTAINMENT CORPORATION NOTES TO FINANCIAL STATEMENTS - (continued) (Unaudited) Note 3 - Liquidity - (continued) Since September 30, 1997 and through the date of this report, the Company has used approximately $55,000 in cash to (i) satisfy certain liabilities, (ii) pay professional fees, which include those associated with existing litigation, (iii) maintain administrative functions (at present the Company only employs one person in finance and has entered into a consulting agreement with one other person (see below)) and (iv) identify and consider various alternative business opportunities. The Company expects it will continue in this manner for the foreseeable future. Furthermore, certain liabilities remain which, if paid, and certain claims against the Company exist which, if successfully asserted, could result in there being no cash remaining with which to seek alternative business opportunities. These claims and liabilities include but are not limited to: Professional Fees. In connection with its now discontinued acquisition program, the Company incurred substantial professional fees. Of the amount billed, $353,799 remains unpaid to law firm retained in that connection . Previously, in 1994, JD Store Equipment, Inc. ("JD Store Equipment") agreed that, in the event its merger with the Company (the "JD Merger") was not consummated, JD Store Equipment would pay to the Company legal fees billed to the Company by the above law firm. That law firm resigned as counsel to the Company shortly after JD Store Equipment notified the Company that it was terminating the JD Merger in September 1995. Subsequently, the Company made a demand for payment upon JD Store Equipment for all fees and disbursements in the amount of $793,281 billed to it by the law firm, of which $439,482 has to date been paid by the Company. To avoid the uncertainties associated with litigation and with collecting any judgment that may be obtained, the Company attempted to reach a settlement with JD Store Equipment. However, there are no ongoing discussions at present regarding a settlement and there is no assurance that any settlement will be concluded. Shareholder Litigation. As previously reported, on April 9, 1996, a lawsuit was filed against the Company and certain others, including the members of the then Board of Directors, in the Superior Court of California, by certain individuals who allegedly purchased or purchased and sold securities of the Company, entitled Gary N. Gibbs et al. v. Choices Entertainment Corporation et al., in which plaintiffs seek monetary damages against the Company and other defendants in the amount of $303,470, plus attorney's fees, costs of suit and such other relief as the Court deems just. The Company is presently involved in settlement negotiations with the plaintiffs. Unless the Company is able to conclude a settlement, as to which no assurance can be given, the Company intends to continue to contest the lawsuit vigorously.(See Part II Item 1. Legal Proceedings). Even if the Company is successful in defending this lawsuit or in concluding a settlement, the cost alone in professional fees will be substantial and material in amount. In addition, the continuing uncertainty associated with this lawsuit has made it difficult for the Company to find other business opportunities. The Company's 5% unsecured promissory notes (the "Notes"), in the principal amount of $680,000, matured on September 11, 1997, leaving the holders thereof with the sole remedy of converting such notes into shares of the Company's Series C Preferred Stock (valued at $.25 per share of Common Stock). The holders of $670,000 in Notes have, in accordance with the terms of the Notes, converted such Notes into 67 shares of the Company's Series C Preferred Stock. In addition, the Company elected to issue 3.6833 shares of its Series C Preferred Stock to the holders of the Notes, in payment of $36,833 of accrued interest due such noteholders in September 1997, in accordance with the terms of such Notes. Ronald W. Martignoni, the Company's President and Chief Executive Officer, has taken a position with an unrelated company, effective October 6, 1997. Mr. Martignoni continues as the Company's Chairman, President and Chief Executive Officer, under a consulting agreement. His compensation has been reduced accordingly. The Company's viability for the foreseeable future is and will continue to be dependent upon its ability to successfully conclude existing litigation, to find other business opportunities and to secure needed capital. No assurance can be given that the Company will be successful in that regard. In the event the Company is not successful, it is unlikely that there would be any amounts available for distribution to the Company's stockholders. CHOICES ENTERTAINMENT CORPORATION NOTES TO FINANCIAL STATEMENTS - (continued) (Unaudited) Note 4 - West Coast Transaction and Discontinued Operations As previously reported, the Company consummated the previously announced sale of substantially all of its assets to West Coast on June 16, 1997. The consideration for the assets sold consisted entirely of cash in the amount of $2,430,000. A substantial portion of the proceeds was used to reduce a portion of the Company's liabilities at closing. In addition, $243,000 of the proceeds was escrowed with West Coast pursuant to the terms of the Asset Purchase Agreement between the Company and West Coast. The escrowed funds will be released to the Company in three installments of $81,000 (plus interest) every six months over a period of eighteen months, subject to amounts withheld pursuant to any claims made by West Coast under the terms of the Escrow Agreement between the Company and West Coast. The Company recognized a net gain on the sale of its assets of approximately $1,312,000, which has been reported in discontinued operations on the Statements of Income (Loss) for the nine-month period ended September 30, 1997. Revenues for the discontinued business for the nine-month period ended September 30, 1997, was $2,116,000, compared to revenues for the discontinued business for the three-month and nine-month periods ended September 30, 1996, of $1,305,000 and $3,877,000, respectively. The assets sold in the West Coast Transaction, net of applicable liabilities, have been reclassified as noncurrent assets and current liabilities of the discontinued business on the 1996 Balance Sheet. At December 31, 1996, approximately $1,054,000 related to net noncurrent assets, and approximately $908,000 related to net current liabilities of the discontinued business. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following is Management's discussion and analysis of certain significant factors which have affected the Company's financial condition, changes in financial condition, and results of operations. The discussion also includes the Company's liquidity and capital resources at September 30, 1997 and later dated information, where practicable. Financial Condition, Liquidity and Capital Resources As previously reported, on June 16, 1997, the Company sold substantially all of its assets and business to West Coast Entertainment Corporation, ("West Coast"). Notwithstanding the sale of its operating business, the Company's financial statements included herein have been presented on the basis that the Company is a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has incurred net losses, aggregating $21,622,376 from inception through September 30, 1997, including a net loss of $868,627 for the nine months ended September 30, 1997, before a net gain of $1,312,045 from the sale of substantially all of the Company's assets to West Coast ( the "West Coast Transaction") (see Note 4 ). As of September 30, 1997, the Company had a net working capital deficiency of approximately $252,000. The West Coast Transaction provided $2,430,000 in cash, of which $243,000 remains in escrow with West Coast, and $203,000 remained available to the Company at September 30, 1997, after the payment of liabilities and other expenses. The cash available at time of closing the West Coast Transaction was less than anticipated because of delays in the closing of the West Coast Transaction during which time the Company continued to operate at a loss. Since September 30, 1997 and through the date of this report, the Company has used approximately $55,000 in cash to (i) satisfy certain liabilities, (ii) pay professional fees, which include those associated with existing litigation, (iii) maintain administrative functions (at present the Company only employs one person, in finance and has entered into a consulting agreement with one other person (See below)), and (iv) identify and consider various alternative business opportunities. The Company expects it will continue in this manner for the foreseeable future. Furthermore, certain liabilities remain which, if paid, and certain claims against the Company exist which, if successfully asserted, could result in there being no cash remaining with which to seek alternative business opportunities. These claims and liabilities include but are not limited to: Professional Fees. In connection with its now discontinued acquisition program, the Company incurred substantial professional fees. Of the amount billed, $353,799 remains unpaid to law firm retained in that connection . Previously, in 1994, JD Store Equipment, Inc. ("JD Store Equipment") agreed that, in the event its merger with the Company (the "JD Merger") was not consummated, JD Store Equipment would pay to the Company legal fees billed to the Company by the above law firm. That law firm resigned as counsel to the Company shortly after JD Store Equipment notified the Company that it was terminating the JD Merger in September 1995. Subsequently, the Company made a demand for payment upon JD Store Equipment for all fees and disbursements in the amount of $793,281 billed to it by the law firm, of which $439,482 has to date been paid by the Company. To avoid the uncertainties associated with litigation and with collecting any judgment that may be obtained, the Company attempted to reach a settlement with JD Store Equipment. However, there are no ongoing discussions at present regarding a settlement and there is no assurance that any settlement will be concluded. Shareholder Litigation. As previously reported, on April 9, 1996, a lawsuit was filed against the Company and certain others, including the members of the then Board of Directors, in the Superior Court of California, by certain individuals who allegedly purchased or purchased and sold securities of the Company, entitled Gary N. Gibbs et al. v. Choices Entertainment Corporation et al., in which plaintiffs seek monetary damages against the Company and other defendants in the amount of $303,470, plus attorney's fees, costs of suit and such other relief as the Court deems just. The Company is presently involved in settlement negotiations with the plaintiffs. Unless the Company is able to conclude a settlement, as to which no assurance can be given, the Company intends to continue to contest the lawsuit vigorously.(See Part II Item 1. Legal Proceedings). Even if the Company is successful in defending this lawsuit or in concluding a settlement, the cost alone in professional fees will be substantial and material in amount. In addition, the continuing uncertainty associated with this lawsuit has made it difficult for the Company to find other business opportunities. The Company's 5% unsecured promissory notes (the "Notes"), in the principal amount of $680,000, matured on September 11, 1997, leaving the holders thereof with the sole remedy of converting such notes into shares of the Company's Series C Preferred Stock (valued at $.25 per share of Common Stock). The holders of $670,000 in Notes have, in accordance with the terms of the Notes, converted such Notes into 67 shares of the Company's Series C Preferred Stock. In addition, the Company elected to issue 3.6833 shares of its Series C Preferred Stock to the holders of the Notes, in payment of $36,833 of accrued interest due such noteholders in September 1997, in accordance with the terms of such Notes. Ronald W. Martignoni, the Company's President and Chief Executive Officer, has taken a position with an unrelated company, effective October 6, 1997. Mr. Martignoni continues as the Company's Chairman, President and Chief Executive Officer, under a consulting agreement. His compensation has been reduced accordingly. The Company's viability for the foreseeable future is and will continue to be dependent upon its ability to successfully conclude existing litigation, to find other business opportunities and to secure needed capital. No assurance can be given that the Company will be successful in that regard. In the event the Company is not successful, it is unlikely that there would be any amounts available for distribution to the Company's stockholders. This Quarterly Report on Form 10-QSB contains forward looking information with respect to, among other things, plans, future events or future performance of the Company, the occurrence of which involve certain risks and uncertainties that could cause actual results or future events to differ materially from those expressed in any forward looking statements. These risks and uncertainties include, but are not limited to, the risks and uncertainties associated with adverse litigation, the ability to identify and conclude alternative business opportunities, and those risks and uncertainties detailed in the Company's filings with the Securities and Exchange Commission. Where any forward looking statement includes a statement of the assumptions or bases believed to be reasonable and are made in good faith, assumed facts or bases almost always vary from actual results, and the differences between assumed facts or bases and actual results can be material, depending upon the circumstances. Where, in any forward looking statement, the Company expresses an expectation or belief as to plans or future results or events, such expectation or belief is expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the statement of expectation or belief will result or be achieved or accomplished. The words "believe", "expect" and "anticipate" and similar expressions identify forward looking statements. Capital Expenditures During the nine-month period ended September 30, 1997, the Company's capital expenditures, relating to the purchase of videocassette rental films and furniture and fixtures, were approximately $621,000 and $10,000, respectively, compared to $1,251,000 and $13,000, during the same period in 1996. The Company does not anticipate any capital expenditures for the remainder of the current year. Material Changes in Financial Condition Assets: Total assets decreased by approximately $694,000 between December 31, 1996 and September 30, 1997, as the result of: (1) an increase in assets from the sale of substantially all of the Company's assets to West Coast (see Note 4 to the Financial Statements), (2) a decrease in assets consumed by the operating loss for the period, and (3) a decrease in assets due to payment of a substantial portion of the Company' liabilities from a substantial portion of the proceeds received from the West Coast Transaction. Liabilities: Total liabilities decreased by approximately $1,854,000 between December 31, 1996 and September 30, 1997, primarily due to the payment of a substantial portion of the Company's liabilities from a substantial portion of the proceeds received from the West Coast Transaction and to the conversion of $670,000 of the Company's 5% unsecured promissory notes payable along with accrued interest thereon into approximately 72 shares of the Company's Series C Preferred Stock. Stockholders' Deficit: Between December 31, 1996 and September 30, 1997, the decrease in stockholders' deficit was due to the net income of approximately $443,000 for the nine-month period ended June 30, 1997 and to the issuance of approximately 72 shares of the Company's Series C Preferred Stock (see Liabilities: above). Included in net income was a net gain of approximately $1,312,000 which related to the sale of substantially all of the Company's assets to West Coast (See Note 4 to the Financial Statements). Material Changes in Results of Operations Continuing Operations: Losses from continuing operations were approximately $298,000 and $564,000 during the three-month and nine-month periods ended September 30, 1997, compared to losses of approximately $123,000 and $336,000 during the comparative periods in 1996. The increases of approximately $175,000 and $228,000 during the three-months and nine-months periods ended September 30, 1997, respectively were primarily related to the continuing professional fees and costs associated with existing litigation.(See Part II Item 1.), to increased selling and administrative expenses primarily related to the expense associated with officers and directors liability insurance in effect during the 1997 period, and to increases in penalty and late charges incurred as a result of the Company's severely distressed financial condition, which were incurred prior to the sale of substantially all of the Company's assets to West Coast. Discontinued Operations: The loss from discontinued operations, before the gain of approximately $1,312,000 from the sale of substantially all of the Company's assets to West Coast, was approximately $305,000 for the nine-month period ended June 30, 1997, compared to losses of approximately $72,000 and $142,000 for the three-month and nine-month periods in 1996. The increased losses during the nine-month comparative periods are primarily related to less favorable rental-weather conditions, the adverse affect of the lack of strong rental titles, and, to a lesser extent, competition during the 1997 periods. In addition, during the nine-month 1997 comparative period, cost of movie rentals resulting from a pay per transaction arrangement with a supplier of videocassette rental films were approximately $188,000.(The Company had no such arrangement with this supplier during the 1996 comparative period). Additionally, the Company had ten stores in operation during the 1996 periods compared with nine stores in operation during 1997. Net Loss: As a result of the foregoing, the Company incurred a net loss of approximately $298,000 and $869,000 during the three-month and nine-month periods ended September 30, 1997, respectively, before a gain of approximately $1,312,000, net of tax, for the nine-month period, on the sale of substantially all of the Company's assets to West Coast (See Note 4 to the Financial Statements) . PART II - OTHER INFORMATION Item 1. Legal Proceedings The following is a description of material pending legal proceedings to which the Company is a party or of which any of its property is the subject: Gibbs Litigation. As previously reported, on April 9, 1996, a lawsuit was filed against the Company in the Superior Court of California, entitled Gary N. Gibbs et al. v. Choices Entertainment Corporation et al., No. BC147815, by certain individuals who allegedly purchased or purchased and sold securities of the Company. Also named as defendants in the lawsuit were the members of the then Board of Directors, a former director and certain others. It is alleged that the Company made false and misleading statements and omitted to state certain material facts in public communications and in reports filed with the Securities and Exchange Commission with regard to a possible merger with JD Store Equipment, Inc. ("JD Store"), which was terminated by JD Store in September 1995, and with regard to the Company's related acquisition program. On July 12, 1996, Demurrers to the Complaint filed on behalf of the Company and the other defendants were sustained. On July 29, 1996, a Second Amended Complaint was filed, in which plaintiffs seek monetary damages against the Company and the other defendants in the amount of $303,470, plus attorney's fees, costs of suit and such other relief as the court deems just. The plaintiffs are principally the same individuals who filed the prior Complaint, which contains substantially the same allegations as now set forth in the Second Amended Complaint. On August 28, 1996, the Company filed an answer to the Complaint, denying plaintiffs allegations with regard to all claims. On October 22, 1996, the Company also filed a motion for summary judgment, which was denied on November 26, 1996, and on May 27, 1997, the plaintiffs filed a motion for summary judgment, which was denied on June 27, 1997. Following discovery, the Company filed a new motion for summary judgment on August 25, 1997, and on August 27, 1997, the plaintiffs also filed a new motion for summary judgment. On October 6, 1997, all motions for summary judgment were denied, except that one count against one former director was dismissed. The Company is presently involved in settlement negotiations with the plaintiffs. Unless the Company is able to conclude a settlement, as to which no assurance can be given, the Company intends to continue to contest the lawsuit vigorously. No firm date for trial has been scheduled. Syrstad Litigation. On September 8, 1997, a lawsuit was filed by the Company against R. Mark Syrstad, a former officer, in the Superior Court of California, entitled Choices Entertainment Corporation v. R. Mark Syrstad, No. BC 177446, in which the Company is seeking repayment of a loan of $62,000 made by the Company to Mr. Syrstad in 1995, together with interest. 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 None. SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CHOICES ENTERTAINMENT CORPORATION Date: November 12, 1997 By: /s/ Ronald W. Martignoni ____________________________ Ronald W. Martignoni Chief Executive Officer Date: November 12, 1997 By: /s/ Lorraine E. Cannon ____________________________ Lorraine E. Cannon Chief Financial Officer INDEX TO EXHIBITS Exhibit No. Description of Exhibit _______ ______________________ 3 (a) Certificate of Incorporation, as amended (1) (b) Certificate of Designations of Series C Preferred Stock, as amended (2) (c) By-Laws, as amended (3) 4 (a) Form of Certificate Evidencing Shares of Common Stock (4) (b) Form of 5% Promissory Note (5) 10(a) Consulting Agreement between Registrant and Ronald W. Martignoni(6) 27(a) Financial Data Schedule (6) ________________________________________________________________________________ (1) Filed as an Exhibit to Registrant's Registration Statement on Form S-8 (File No. 33-87016) and incorporated herein by reference. (2) Filed as an Exhibit to Registrant's Annual Report on Form 10-KSB, for the year ended December 31,1996 and incorporated herein by reference. (3) Filed as an Exhibit to Registrant's Annual Report on Form 10-K for the year ended December 31, 1992 and incorporated herein by reference. (4) Filed as an Exhibit to Registrant's Registration Statement on Form S-1, inclusive of Post-Effective Amendment No.1 thereto (File No.: 33-198983) and incorporated herein by reference. (5) Filed as an Exhibit to Registrant's Quarterly Report on Form 10-QSB for the quarter ended September 30, 1995 and incorporated herein by reference. (6) Filed herewith. E-1 EX-10.A 2 EXHIBIT 10(A) Exhibit 10(a) CONSULTING AGREEMENT This Consulting Agreement is made as of the 6th day of October, 1997, between Ronald Martignoni ("Martignoni") and Choices Entertainment Corporation ("Choices"). WHEREAS, Martignoni has accepted employment with an unrelated company. NOW, THEREFORE, in consideration of their mutual rights and obligations, and other good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereto agree as follows: 1. Services To Be Provided By Consultant. Martignoni hereby agrees to continue to serve as Chairman of Choices' Board of Directors and as its President and Chief Executive Officer and to act as Choices' client representative in all pending litigation, to assist in locating and evaluating possible business opportunities for Choices, and to perform such other duties as may be delegated to him by the Choices Board of Directors. 2. Compensation. Martignoni is to receive Five Thousand Dollars ($5,000) per month for his services as a consultant pursuant to this Consulting Agreement. 3. Term. This Consulting Agreement shall expire by its own terms and without further notice on April 30, 1998, unless extended by Choices. Choices may otherwise terminate this agreement upon written notice to Martignoni in the sole discretion of Choices. Upon thirty (30) days written notice, Martignoni may also terminate this Consulting Agreement. Upon termination of this agreement, Martignoni shall receive his pro rata compensation up to the date of such termination. 4. Independent Contractor Acknowledgement. Martignoni hereby acknowledges that he is an independent contractor and not an employee of Choices under this Consulting Agreement. Martignoni is solely responsible for the payment of all income taxes, social security payments, and any other taxes or fees that arise out of any compensation he receives pursuant to this Consulting Agreement. 5. Release of Prior Claims. Except for his rights under and pursuant to existing stock options, including their continued registration, and his rights, if any, to be indemnified under Choices by laws, including with respect to any pending litigation, Martignoni hereby releases Choices from any and all obligations it may have to him other than as provided for under this Consulting Agreement. Without limiting the generality of the foregoing, Martignoni specifically releases Choices from any and all claims he may have against it pursuant to his Severance Agreement dated on or about March 31, 1992, as modified. WHEREFORE, the parties have put their hands and seals this 11th_ day of November, 1997. CHOICES ENTERTAINMENT CORPORATION By /s/ Fred Portner _________________________________ Fred Portner, Director (SEAL) /s/ Ronald Martignoni _________________________________(SEAL) RONALD MARTIGNONI EX-27. 3 EXHIBIT-27 FDS
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-31-1997 JAN-01-1997 SEP-30-1997 203,073 0 16,858 0 0 400,638 4,034 161 486,186 652,482 0 0 1 220,044 (386,341) 486,186 2,115,622 2,115,622 320,120 320,120 2,627,048 0 37,081 0 0 (564,842) (303,785) 0 0 443,418 .02 .02
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