10QSB 1 a2031172z10qsb.txt 10QSB 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. ------------------------------------------------------------------------------- (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) 111 Queen Anne Avenue North Suite 501 Seattle, Washington 98109 --------------------------------------------- ----------- (Address of Principal Executive Offices) (Zip code) Issuer's Telephone Number, Including Area Code 206-270-9200 ------------ ------------------------------------------------------------------------------- (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 ----------------------------- Part I - FINANCIAL INFORMATION Item 1. Financial Statements
PAGE 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
[THIS SPACE INTENTIONALLY LEFT BLANK] (i) PART I. Financial Information Item 1. Financial Statements CECS CORP. CONDENSED BALANCE SHEET (Unaudited)
September 30, 2000 ------------------ ASSETS Current assets: Cash $ 18,498 Cash due from Brokers 20,524 Marketable Securities 1,638,742 Prepaid rent expenses 25,289 ------------ Total current assets 1,703,053 Other assets: Furniture, Fixtures and Equipment - net of depreciation 12,489 Non-marketable securities at cost 75,000 ------------ 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 ------------ Total current liabilities 607,505 ------------ Long-term liabilities -0- ------------ 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 ------------ Total stockholders' deficit 1,144,842 ------------ $ 1,752,347 ============
See accompanying notes to financial statements. -1- CECS CORP. CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (Unaudited)
For the Three Months For the Nine Months Ended September 30, Ended September 30, ------------------------ ----------------------- 1999 2000 1999 2000 ----------- ----------- ---------- ---------- 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 ----------- ---------- 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- =========== =========== ========== ==========
See accompanying notes to financial statements. [THIS SPACE INTENTIONALLY LEFT BLANK] -2- CECS CORP. CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY For the Nine Months Ended September 30, 2000 (Unaudited)
Preferred Stock Common Stock Additional Compre- ----------------- ---------------------- Paid-in Accumulated hensive Shares Amount Shares Amount Capital Deficit Income Total -------- ------ ----------- -------- ----------- ------------ ---------- ---------- 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 ======== ====== =========== ======== =========== ============ ========== ==========
See accompanying notes to financial statements. [THIS SPACE INTENTIONALLY LEFT BLANK] -3- CECS CORP. CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
For the Nine Months Ended September 30, -------------------------- 1999 2000 ---------- --------- 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- ---------- ---------- Total adjustments 502,355 (119,557) ---------- ---------- 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 ---------- ---------- Net increase (decrease) in cash 52,917 (184,451) Cash at beginning of period 2,074 197,117 ---------- ---------- $ 54,991 $ 12,666 Cash at end of period ========== ========== Supplementary disclosure of cash flow information: $ -0- $ -0- Cash paid during the year for interest ========== ==========
See accompanying notes to financial statements. [THIS SPACE INTENTIONALLY LEFT BLANK] -4- 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.
For the Nine Months Ended September 30, ----------------------------- Number of shares used in calculation 1999 2000 ------------------------------------ ----------- ---------- Basic 22,004,000 34,328,799 Diluted 26,364,395 42,835,709
-5- 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 -6- 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 -7- 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 -8- 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
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) 10.99 (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) -------------------------------------------------------------------------------
(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. -9- (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 -------------------------------------- Tracy M. Shier, Director, President and Chief Executive Officer -10-