<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
/X/ Quarterly report under Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 2000
/ / Transition report under Section 13 or 15 (d) of the Exchange Act
For the transition period from _____________ to _____________
Commission file number 000-17001
CECS CORP.
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(Exact Name of Small Business Issuer as Specified in Its Charter)
Delaware 52-1529536
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
111 Queen Anne Avenue North, Suite 501
Seattle, Washington 98109
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(Address of Principal Executive Offices) (Zip code)
Issuer's Telephone Number, Including Area Code
(206) 270-9200
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Choices Entertainment Corporation
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(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 or15 (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 June 30, 2000:
46,166,155
Transitional Small Business Disclosure Format (check one):
Yes / / No /X/
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PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Item 1. Financial Statements
Index to Financial Statements Page Number
<S> <C>
Condensed Balance Sheet at June 30, 2000 (Unaudited)............................ 1
Condensed Statements of Income for the
Three and Six Months Ended June 30, 2000 and 1999 (Unaudited)................... 2
Condensed Statement of Stockholders' Equity for the
Six Months Ended June 30, 2000 (Unaudited)...................................... 3
Condensed Statements of Cash flows for the
Three and Six Months Ended June 30, 2000 and 1999 (Unaudited)................... 4
Notes to Financial Statements.................. ................................ 5
Item 2. Management Discussion and Analysis............................ 7
Part II - OTHER INFORMATION
Item 1. Legal Proceedings............................................. 9
Item 6. Exhibits Index................................................ E-1
</TABLE>
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Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
CECS CORP.
CONDENSED BALANCE SHEET
(Unaudited)
<TABLE>
<CAPTION>
June 30, 2000
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<S> <C>
ASSETS
Current assets:
Cash $ 71,596
------------
Total current assets 71,596
Other assets
Prepaid rent expense 32,893
Non-marketable securities - net at cost 630,700
Furniture and Fixtures - net of depreciation 10,054
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Total assets $ 745,243
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expense $ 34,038
Notes Payable - current 320,000
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Total current liabilities 354,038
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Long-term liabilities
Total long-term liabilities -0-
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Total liabilities 354,038
Stockholders' Equity:
Preferred stock, par value $.01 per share:
Authorized 5,000 shares: 56.534 shares issued
and outstanding 1
Common stock, par value $.01 per share:
Authorized 50,000,000 shares:46,207,035 issued
and outstanding 462,070
Additional paid-in-capital 22,276,035
Accumulated deficit (22,346,901)
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Total stockholders' equity 391,205
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$ 745,243
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</TABLE>
See accompanying notes to financial statements.
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CECS CORP.
CONDENSED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
----------------------------- -----------------------------
1999 2000 1999 2000
------ ------ ------ ------
<S> <C> <C> <C> <C>
Operating costs and expenses:
Selling and administrative expenses $ 7,977 $ 17,274 $ 16,129 $ 43,985
Professional and consulting expenses 76,112 31,379 113,899 194,889
Depreciation and amortization -0- -0- -0- -0-
------------- ------------- ------------- -------------
Total operating costs and expenses 84,089 48,653 130,028 238,874
------------- ------------- ------------- -------------
Other expenses:
Merger and acquisition expense -0- -0- -0- 27,000
Interest (income) expense, cash-net 2,958 (638) 3,163 (1,225)
Issuance of stock in lieu of interest
expense -0- -0- -0- 14,000
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Total other expenses 2,958 (638) (3,163) 39,775
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Income (loss) from continuing operations (87,047) (48,015) (133,191) (278,649)
------------- ------------- ------------- -------------
Extraordinary Gains (Losses):
Gain on reconciliation of accruals -0- -0- -0- 115,576
Gain on sale of contract rights -0- 203,075 -0- 203,075
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Net Income $ (87,047) $ 155,060 $ (133,191) $ 40,002
============= ============= ============= =============
Net loss per share of common stock:
Basic loss per share:
Continuing operations $ -0- $ -0- $ (0.01) $ -0-
============= ============= ============= =============
Net Income $ -0- $ -0- $ -0- $ -0-
============= ============= ============= =============
Diluted loss per share:
Continuing operations $ -0- $ -0- $ (0.01) $ -0-
============= ============= ============= =============
Net Income $ -0- $ -0- $ -0- $ -0-
============= ============= ============= =============
</TABLE>
See accompanying notes to financial statements.
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CECS CORP.
CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY
For the Six Months Ended June 30, 2000
(Unaudited)
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional
--------------------- ------------------ Paid-in Accumulated
Shares Amount Shares Amount Capital Deficit Total
-------- ---------- -------- ---------- ----------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1999:
109.1 $1 28,504,395 $285,044 $21,496,035 $(22,386,903) $(605,823)
Issuance of preferred stock
In exchange for debt and cash:
390 $3 779,997 - 780,000
Issuance of common stock
on conversion of preferred stock:
(442.566) - 17,702,640 177,026 - - 177,026
Net income for the six months
ended June 30, 2000:
40,002 40,002
------- -------- ---------- -------- ----------- -------------- ----------
56.534 $1 46,207,035 $462,070 $22,276,035 $ (22,346,901) $391,025
====== ======== ========== ======== =========== ============= ==========
</TABLE>
See accompanying notes to financial statements.
[THIS SPACE INTENTIONALLY LEFT BLANK]
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CECS CORP.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the Six Months
Ended June 30,
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1999 2000
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<S> <C> <C>
Cash flows from operating activities:
Net Income $ (133,191) $ 40,002
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Adjustments to reconcile net income
to net cash provided by (used in) operating activities:
Depreciation and amortization -0- -0-
Change in assets and liabilities:
Change in prepaid expense -0- (32,893)
Change in furniture and fixtures (10,054)
Change in accounts payable (6,000) (341,898)
Change in accrued merger and acquisition
expenses (50,000) 27,000
Change in accrued professional fees 62,942
Change in other accrued expenses -0- (5,189)
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Total adjustments 6,942 (363,034)
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Net cash provided by (used in) operating activities (126,249) (323,023)
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Cash flows from investing activities:
Purchase of non-marketable securities -0- (630,700)
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Net cash provided by (used in) investing activities (630,700)
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Cash flows from financing activities:
Proceeds from notes payable 125,000 320,000
Repayment of notes (250,000)
Issuance of preferred stock 780,000
Other investing activities 65,797
Other long-term liabilities 3,163 (14,167)
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Net cash used in financing activities 128,163 901,630
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Net increase (decrease) in cash 1,914 52,102
Cash at beginning of period 2,074 19,494
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Cash at end of period $ 3,988 $ 71,596
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Supplementary disclosure of cash flow information:
Cash paid during the year for interest $ -0- $ 167
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</TABLE>
See accompanying notes to financial statements.
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CECS CORP.
NOTES TO FINANCIAL STATEMENTS
Note 1. Financial Statements
Quarterly Financial Statements:
The accompanying unaudited financial statements for the
three-month and six-month periods ended June 30, 2000 and 1999
have been prepared in accordance with the instructions for
Form 10QSB.
In the opinion of management, all adjustments, consisting of
normal recurring adjustments, which are necessary for a fair
presentation of the results for the interim period have been
made. The results of operations for the three-month and
six-month periods ended June 30, 2000, are not necessarily
indicative of the results to be expected for the full year.
Note 2. Summary of Significant Accounting Policies
Net Income (Loss) Per Common Share
Primary income per share for the three-month periods ended
June 30, 2000 and June 30, 1999 was computed by dividing the
net income by the weighted average number of common shares
outstanding during the periods.
Fully diluted income per share for the six-month period ended
June 30, 2000 and June 30, 1999 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.
<TABLE>
<CAPTION>
For the Six Months
Ended June 30,
----------------------
1999 2000
---------- ----------
<S> <C> <C>
Number of shares used in calculation
Basic 22,004,000 34,328,799
Diluted 26,364,395 42,835,709
</TABLE>
Cash and Cash Equivalents
The Company considers all certificates of deposit and highly
liquid debt instruments purchased maturing in three months or
less to be cash equivalents.
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Revenue Recognition
Revenue is recognized using the accrual method of accounting.
Securities
Marketable securities are carried at lower of cost or market.
Non-marketable securities are carried at cost.
Note 3. Liquidity
The Company continues to rely on borrowing and
capital raising activities to provide funds for its
operating and investing activities. The Company's
viability for the foreseeable future is and will
continue to be dependent upon its ability to find
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.
Note 4. Notes Payable
The Company continues to rely on borrowing and capital raising
activities to provide funds for its for operating and
investing activities. The Company has borrowed $320,000 as of
the quarter ending June 30, 2000. The notes are for a six
month term and accrue interest at 12% per annum compounded
annually payable at maturity.
Note 5. Related Party Transactions
The Company has entered into a consulting agreement (the
"Consulting Agreement") with a director memorializing an
agreement for the director to provide certain financial and
analytical services to the Company in exchange for an accruing
payment of $10,000 per month payable when, as and if the
Company has cash not required for other important corporate
purposes. The Consulting Agreement is effective as of June
1998 and expires by its terms December 1999.
In August 1999, the Company's Board of Directors passed
a resolution expressly recognizing the obligation of
the Company to compensate each of Jim Sink, George
Pursglove, Thomas Renna and Tracy Shier for services
rendered and to be rendered to the Company in
connection with the change of control of the Company
and the
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Note 5. Related Party Transactions (continued)
maintenance of it as an existing, reporting corporation,
Pursuant to that resolution, the Board fixed the obligation
to each of the named individuals at $120,000 and gave
each the option to take some part or that entire
amount in securities of the Company. On December 29,
1999 the Board of Directors of the Company passed a
resolution instructing the Company's transfer agent
to issue restricted shares of the Company's common
stock to the named individuals, in an amount of
shares and in exchange for release of an amount of
the Company's obligation as follows: Jim
Sink--2,400,000 shares--$120,000; George
Pursglove--1,200,000 shares--$60,000; Thomas
Renna--1,200,000 shares--$60,000; and Tracy
Shier--1,200,000 shares--$60,000. At or about the
time of the adoption of the December 29th resolution,
the price of the stock was approximately $.05 per
share.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following is our discussion of certain significant factors
that have affected the Company's financial condition changes in
financial condition, and results of operations. The discussion also
includes our liquidity and capital resources at June 30, 2000 and later
dated information, where practicable. The following discussion should
be read in conjunction with the Financial Statements and notes included
in this form 10-QSB.
The Board of Directors (the "Board") of Choices Entertainment
Corporation (the "Company" or "We") adopted a proposal on January 17,
2000 to change the business of the Company to that of a technology
holding company. We are acquiring, investing in, and incubating
companies engaged in Internet, computing and other technologies in
various stages of development. On May 26, 2000 at the Annual Meeting,
our stockholders' adopted a resolution proposed by the board of
directors of the Company changing the name of the Company to CECS Corp.
We have acquired securities issued by publicly traded
Photochannel Networks Inc. In January 2000, the Company subscribed
to a private placement of CAN$2,300,000 principal amount of
Convertible Subordinated Redeemable 0% Debentures maturing
April 30, 2000 (the "Debentures") issued by PhotoChannel Networks
Inc., a British Columbia corporation ("Photochannel"). The
subscription agreement calls for advances to Photochannel in
exchange for the issuance of Debentures as follows:
CAN$350,000 by January 31, 2000; CAN$750,000 by February 29, 2000;
and CAN$1,200,000 by April 14, 2000. The Debentures are convertible
into Photochannel common stock, no par value, ("Photochannel Stock") at
the rate of 1 share of Photochannel Stock for each CAN$.50 in debenture
principal amount. Also, the company was granted warrants pursuant to a
vesting schedule to purchase additional shares of Photochannel Stock as
follows: 140,000 warrants with an exercise price of CAN$.75; 300,000
warrants with an exercise price of CAN$1.00; and 480,000 warrants with
an
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<PAGE>
exercise price of CAN$1.25. Each warrant entitles the Company to
purchase 1 share of Photochannel Stock at the exercise price, for cash.
The warrants are presently fully vested and will expire June 30, 2000.
As of the date of the filing of this report on Form 10QSB,
the Company had completed its obligations under the subscription
agreement and has converted the Debentures to common stock and has
exercised the warrants. All of the securities acquired in this
transaction as well as the securities into which the securities
acquired are convertible or exercisable against are restricted
securities ad must be held for the applicable holding period from the
date of conversion or exercise, as the case may be. The applicable
holding period in most cases is 1 year.
We have acquired securities of non-publicly traded Tridium
Research, Inc. In March 2000, the Company paid $50,000 cash to acquire
250,000 shares of common stock of Tridium Research Inc., a Washington
corporation ("Tridium") based in Kirkland, Washington. The 250,000
shares of common stock acquired represents approximately 5% of all
Tridium common stock issued and outstanding. The Company has also
obligated itself to provide an additional $200,000 to Tridium, upon
terms and conditions to be determined. In May 2000, the Company
provided an additional $25,000 to Tridium to purchase an additional
125,000 shares of common stock of Tridium.
The Company generated no revenues from operations during the
six months ended June 30, 2000. The Company did, however, realize an
extraordinary gain of US$203,075 (CAN$300,000) as a result of the sale
of its contractual rights to subscribe to certain of the securities of
Photochannel in the transaction described above. The primary source of
funds for the six-month period was the completion of a private
placement of the Company's Series C Preferred Stock (the "Preferred
Stock") and shareholder loans.
In February 2000, the Company closed a self-offered private
offering of 390 shares of the Company's Preferred Stock in the
aggregate offering amount of $780,000. Offering expenses were less than
$3,000. Each share of the Preferred Stock is convertible into 40,000
shares of the Company's common stock and carries the voting rights of
the underlying common stock. The proceeds from this offering were used
to retire all notes payable, to pay down the obligations of the Company
to officers and directors of the Company, to pay down accounts payable
to an immaterial amount, and to acquire interests in the two companies
identified above.
The Company paid down $250,000 of notes outstanding as a
result of the private placement discussed above but borrowed $320,000
at an interest rate of 12%.
We anticipate that the Company will not generate any
significant revenues until we accomplish our business objective of
merging or acquiring revenue producing assets from a nonaffiliated
entity. We presently have no liquid financial resources to offer an
acquisition candidate and must rely upon an exchange of our stock to
complete a merger or acquisition.
Between December 31, 1999 and June 30, 2000 the Company
incurred a net loss on continuing operations of $(278,649) and achieved
net income of $40,002. Because of
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the number of shares outstanding, earnings on a per share basis is
negligible but positive.
The Company's viability for the foreseeable future is and
will continue to be dependent upon its ability 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.
We estimate that at the time of filing this report,
outstanding liabilities of the Company are approximately $400,000 and
cash in the bank is approximately $20,000.
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 risk 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 assumption or
bases believed to be reasonable and are made in good faith, assumed
facts or bases almost always vary from actual result, 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 and 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.
Part II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is a defendant to the lawsuit Dion Signs & Service, Inc.
vs. Choices Entertainment Corporation, Civil Action No. 91-6871. The case is now
pending in the Providence County Superior Court, Providence, Rhode Island. Dion
Signs & Service, Inc. alleges that it is owed approximately $33,000 plus
interest, costs and reasonable attorney's fees for the failure by Choices
Entertainment Corporation to pay for signage that was erected at various
locations pursuant to a contract. The Company is advised that pre-judgment
interest on the claim accrues from the date the cause of action arose and that
the amount of pre-judgment interest could approximate the amount of the claim,
or approximately $33,000. The Company is further advised that the case has not
been set for trial, there has been very little discovery, and that it is not
possible to determine the likelihood of the outcome of this case at this time.
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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.
CECS CORP.
(Registrant)
Date: August 11, 2000 By: /s/ Tracy M. Shier
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Tracy M. Shier, Director, President and
Chief Executive Officer
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INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
No. Description of Exhibit
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<S> <C>
3(a) Certificate of Incorporation, as amended (1)
(b) Certificate of Designations of Series C Preferred Stock, as amended (2)
(c) By-Laws, as amended (3)
(d) Certificate of Amendment filed 7/24/2000 (8)
4(a) Form of Certificate Evidencing Shares of Common Stock (4)
(b) Form of 5% Promissory Note (5)
10.99 Consulting Agreement between Registrant and Thomas Renna (7)
27 Financial Data Schedule (8)
</TABLE>
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(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-KSB for the
year ended December 31, 1999 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 as an Exhibit to Registrant's Annual Report on Form 10-KSB for the
year ended December 31, 1997.
(7) Filed as an Exhibit to Registrant's Quarterly Report on Form 10-QSB for the
quarter ended March 31, 1999.
(8) Filed herewith.
(9) To be filed by amendment.
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