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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 September 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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(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 September 30, 2000:
60,558,755
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
Index to Financial Statements
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Part I - FINANCIAL INFORMATION
Item 1. Financial Statements
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PAGE
<S> <C>
Condensed Balance Sheet at September 30, 2000
(Unaudited) .............................................................. 1
Condensed Statements of Operations for the
Three and Nine Months Ended
September 30, 1999 and 2000 (Unaudited) .................................. 2
Condensed Statement of Stockholders' Equity
for the Three Months Ended September 30, 2000 (Unaudited)................. 3
Condensed Statements of Cash Flows for the
Three and Nine Months Ended September 30, 1999 and 2000 (Unaudited)....... 4
Notes to Financial Statements ............................................ 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................... 7
Part II - OTHER INFORMATION
Item 1. Legal Proceedings................................................. 9
Item 6. Exhibits Index.................................................... 9
</TABLE>
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PART I. Financial Information
Item 1. Financial Statements
CECS CORP.
CONDENSED BALANCE SHEET
(Unaudited)
<TABLE>
<CAPTION>
September 30, 2000
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<S> <C>
ASSETS
Current assets:
Cash $ 18,498
Cash due from Brokers 20,524
Marketable Securities 1,638,742
Prepaid rent expenses 25,289
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Total current assets 1,703,053
Other assets:
Furniture, Fixtures and Equipment - net of depreciation 12,489
Non-marketable securities at cost 75,000
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Total assets $ 1,790,542
============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 87,505
Accrued expenses -0-
Accrued professional fees 180,000
Notes payable - current 340,000
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Total current liabilities 607,505
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Long-term liabilities -0-
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Total liabilities 607,505
============
Commitments and Contingencies
Stockholders' Equity:
Preferred stock, par value $.01 per share:
Authorized 50,000,000 shares: 22.741 shares issued
and outstanding at September 30, 2000. 3
Common stock, par value $.01 per share:
Authorized 200,000,000 shares: issued and
outstanding 60,558,755 shares at September 30, 2000 605,588
Additional paid-in-capital 22,666,032
Accumulated deficit 23,165,728
Accumulated other comprehensive income (Note_) 1,038,947
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Total stockholders' deficit 1,144,842
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$ 1,752,347
============
</TABLE>
See accompanying notes to financial statements.
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CECS CORP.
CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
------------------------ -----------------------
1999 2000 1999 2000
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Operating costs and expenses:
General and administrative expenses $ 1,098 $ 344,287 $ 17,226 $ 388,272
Professional and consulting expenses 498,313 24,384 612,212 218,273
Stock based compensation -0- 520,000 -0- 520,000
----------- ----------- ---------- ----------
Total operating costs and expenses 499,411 888,671 629,438 1,126,545
----------- ----------- ---------- ----------
Other Income (expense): 3,125 -0- 6,289 -0-
----------- ----------- ---------- ----------
Income (loss) from operations (502,536) (888,671) (635,727) (1,126,545)
----------- ----------- ---------- ----------
Extraordinary Gain (loss):
Gain on sale of marketable securities -0- 29,069 -0- 29,069
Gain on sale of certain contract rights -0- -0- -0- 203,075
Gain on reconciliation of accruals -0- -0- -0- 115,576
----------- ----------- ---------- ----------
Net Income (loss) (502,536) $ (859,602) (635,727) $ (778,825)
Other Comprehensive Income Net of Tax
(Note_) 1,038,947 1,038,947
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Comprehensive Income $ 179,345 $ 260,122
=========== =========== ==========
Net Income (loss) per share of common stock - Note 2:
Basic Income (loss) per share: $ (0.02) $ -0- $ (0.03) $ -0-
=========== =========== ========== ==========
Diluted Income (loss) per share: $ (0.02) $ -0- $ (0.02) $ -0-
=========== =========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
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CECS CORP.
CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY
For the Nine Months Ended September 30, 2000
(Unaudited)
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional Compre-
----------------- ---------------------- Paid-in Accumulated hensive
Shares Amount Shares Amount Capital Deficit Income Total
-------- ------ ----------- -------- ----------- ------------ ---------- ----------
<S> <C> <C> <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) -- $(605,824)
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: (476.359) -- 19,054,360 190,544 -- -- -- 190,544
Issuance of common stock
for Stock Based Compensation: -0- -0- 13,000,000 130,000 390,000 -- -- 520,000
Net income (loss) for the Nine months
ended September 30, 2000: (778,825) -- 778,825
Accumulated other comprehensive
income (Note_): 1,038,947 1,038,947
-------- ------ ----------- -------- ----------- ------------ ---------- ----------
22.741 $ 3 $60,558,755 $605,588 $22,666,032 $ 23,165,728 $1,038,947 $ 114,484
======== ====== =========== ======== =========== ============ ========== ==========
</TABLE>
See accompanying notes to financial statements.
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CECS CORP.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
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<CAPTION>
For the Nine Months
Ended September 30,
--------------------------
1999 2000
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<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (635,727) $ (90,613)
---------- ----------
Adjustments to reconcile net loss
to net cash provided by (used in) operating activities:
Depreciation and amortization -0- 484
Change working capital - net: -0- 1,124
Change in other assets - net (5,650) (21,642)
(50,000)
558,005 (70,944)
-0- (2,859)
-0-
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Total adjustments 502,355 (119,557)
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Net cash provided by (used in) operating activities (133,372) (184,451)
---------- ----------
Cash flows from financing activities:
Proceeds from notes payable 180,000
Other long-term liabilities
---------- ----------
Net cash used in financing activities 186,289
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Net increase (decrease) in cash 52,917 (184,451)
Cash at beginning of period 2,074 197,117
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$ 54,991 $ 12,666
Cash at end of period ========== ==========
Supplementary disclosure of cash flow information: $ -0- $ -0-
Cash paid during the year for interest ========== ==========
</TABLE>
See accompanying notes to financial statements.
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CECS CORP.
NOTES TO FINANCIAL STATEMENTS
Note 1. Financial Statements
Business
On January 17, 2000, the Board of Directors of the Company
decided to change the business of Choices Entertainment
Corporation ("Choices") to that of a technology holding
company. At the annual stockholders meeting in May, 2000,
the stockholders approved the change of the name of the
Company to CECS CORP. In 1997, Choices sold all of its
assets. Until then, Choices was engaged in the retail home
video cassette rental business.
Quarterly Financial Statements:
The accompanying unaudited financial statements for the
three-month and nine-month periods ended September 30, 2000
and 1999 have been prepared in accordance with the
instructions for Form 10QSB.
Use of Estimates
The preparation of consolidated financial statements in
conformity with generally accepted accounting principles
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date
of financial statements and the reported amount of revenues
and expenses during the reporting period. Actual results
could differ from those estimates.
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
nine-month periods ended September 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
September 30, 2000 and September 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 nine-month periods
ended September 30, 2000 and September 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.
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<CAPTION>
For the Nine Months
Ended September 30,
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Number of shares used in calculation 1999 2000
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<S> <C> <C>
Basic 22,004,000 34,328,799
Diluted 26,364,395 42,835,709
</TABLE>
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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.
Revenue Recognition
Revenue is recognized using the accrual method of
accounting.
Securities
Marketable securities are carried at 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 $340,000
as of the quarter ending September 30, 2000. The notes are
for various monthly terms not exceeding one year and accrue
interest at 12% per annum compounded annually payable at
maturity.
Note 5. Related Party Transactions-Subsequent Events
Subsequent Events
Since Tracy M. Shier, President and CEO ("Shier") and Thomas
Renna ("Renna"), VP Investor Relations have worked,
generally, throughout 2000 without compensation, the Board
of Directors approved cash compensation of $100,000 each
through October 31, 2000. Compensation beyond that date was
referred to the future recommendation of the Compensation
Committee of the Board of Directors chaired by an outside
director. Accordingly, $180,000 of compensation was accrued
as current liability as of September 30, 2000 and the
expense charged to General and Administrative Expense in the
Statement of Operations.
Additionally, the Board of Directors approved, as a direct
grant of stock, for past services of Shier and Renna,
10,000,000 and 3,000,000 shares respectively of the
Company's common stock. The fair market value per share of
the Company's common stock OTC-BB was approximately $0.04 on
October 25, 2000. These grants were recorded as common stock
issued and the expense recorded as Stock Based Compensation
(approximately $520,000) in the Statement of Operations. In
conjunction with this compensation, the Board of Directors
approved, in concept, a loan to Renna equal to the income
tax effect of the grant of the common stock
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discussed above. The term of the loan is to be negotiated
and the loan will bear interest at 12%. The loan will be
secured by a pledge of the stock to be held by the company
for safekeeping until the loan is repaid. As part of this
transaction, both Shier and Renna have agreed to release the
Company from any further claims for compensation for past
services.
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 September 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 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 Photochannel Stock and has exercised
the warrants. Upon completion of these transactions some part of the
Photochannel Stock held by us was held of record by us but for the
benefit of other persons and business entities.
On or about xxx, 2000 we received a share certificate for
[1,590,590] Shares of Photochannel Stock. [more]
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
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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
[nine] three months ended September 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 nine-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 has subsequently
borrowed $340,000 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 September 30, 2000 the Company
incurred a net loss on continuing operations of $(278,649) and
achieved net income of $40,002. Because of 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
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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.
Item 6. Exhibits
INDEX TO EXHIBITS
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<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)
4 (a) Form of Certificate Evidencing Shares of Common Stock (4)
(b) Form of 5% Promissory Note (5)
10.99 (a) Consulting Agreement between Registrant and Thomas Renna (7)
(b) Letter of Intent to Acquire Republic Hotel Investors, Inc. (8)
27 Financial Data Schedule (9)
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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.
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(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 and incorporated herein by
reference.
(8) Filed as an Exhibit to Registrant's Current Report on Form 8-K dated
August 30, 1999 and incorporated herein by reference.
(9) Filed herewith.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report On Form 10QSB for the period ended September 30, 2000 to be signed
on its behalf by the undersigned, thereunto duly authorized.
CECS CORP.
(Registrant)
Date: November 14, 2000 By: /s/ Tracy M. Shier
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Tracy M. Shier, Director, President and
Chief Executive Officer
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