<PAGE>
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
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to _______________
Commission File Number: 0-23279
Celerity Systems, Inc.
----------------------------------------------------
(Exact name of small business issuer as specified in its Charter)
Delaware 52-2050585
-------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
9051 Executive Park Drive, Suite 302
Knoxville, Tennessee 37923
-------------------------------------------------------
(Address of principal executive offices)
(423) 539-5300
--------------------------------
(Registrant's telephone number)
-----------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Check whether the registrant (1) has 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 / / No /X/
As of December 19, 1997, 4,104,639 shares of the issuer's common stock were
outstanding.
Transitional Small Business Disclosure Format (check one): Yes / / No /X/
<PAGE>
CELERITY SYSTEMS, INC.
FORM 10-QSB
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
INDEX
Part I FINANCIAL INFORMATION PAGE
Item 1. FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . . . . . . . 3
Condensed Balance Sheets as of September 30, 1997 (Unaudited)
and December 31, 1996. . . . . . . . . . . . . . . . . . . . . . . . . . 3
Condensed Statements of Operations (Unaudited) for the three months
ended September 30, 1997 and 1996. . . . . . . . . . . . . . . . . . . . 4
Condensed Statement of Stockholders' Equity as of
September 30, 1997 (Unaudited) and December 31, 1996 . . . . . . . . . . 5
Condensed Statements of Cash Flows (Unaudited) for the nine months
ended September 30, 1997 and 1996. . . . . . . . . . . . . . . . . . . . 6
Notes to Condensed Financial Statements (Unaudited). . . . . . . . . . . 7
Item 2. MANAGEMENT'S DISCUSSION AND
ANALYSIS OR PLAN OF OPERATION. . . . . . . . . . . . . . . . . . . . . . 10
Part II OTHER INFORMATION
Item 2. CHANGES IN SECURITIES . . . . . . . . . . . . . . . . . . . . . . . 18
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . . . . . . . 18
Item 6. EXHIBITS AND REPORTS ON FORM 8-K. . . . . . . . . . . . . . . . . . 18
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
CELERITY SYSTEMS, INC.
CONDENSED BALANCE SHEETS
DECEMBER 31, SEPTEMBER 30,
ASSETS 1996 1997
------------ -------------
(unaudited)
<S> <C> <C>
Cash and cash equivalents $ 2,344,666 $ 1,030,834
Accounts receivable, less allowance for doubtful accounts
of $555,050 and $567,119 in 1996 and 1997, respectively 713,232 583,206
Inventories 1,325,903 1,236,449
Prepaid expenses - 25,178
Costs in excess of billings on uncompleted contracts 187,749 -
----------- -----------
Total current assets 4,571,550 2,875,667
Property and equipment, net 813,290 837,389
Other assets 264,955 454,880
----------- -----------
$ 5,649,795 $ 4,167,936
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 315,832 $ 1,136,845
Accrued liabilities 672,740 764,753
Deferred revenue 359,970 -
Interest payable 150,000 408,333
Current portion of leases payable 7,821 2,185
Reserve for management compensation 137,500 -
Reserve for estimated losses on uncompleted contracts 672,600 94,335
Billings in excess of costs and estimated earnings on
uncompleted contracts 150,000 128,914
Short term notes payable - 3,800,000
----------- -----------
Total current liabilities 2,466,463 6,335,365
Long term notes payable 3,000,000 -
Long term leases payable 19,009 19,009
Commitments and contingencies (Notes 3 and 7)
Preferred stock, Series A, noncumulative, redeemable,
convertible, $0.01 par value, 975,836 shares
authorized, issued and outstanding at December 31, 1996
and September 30, 1997, respectively 1,813,412 1,949,987
Preferred stock, Series B, noncumulative, redeemable,
convertible, $0.01 par value, 408,479 shares
authorized, issued and outstanding at December 31, 1996
and September 30, 1997, respectively 932,720 1,004,774
Common stock, $0.001 par value, 15,000,000 shares
authorized, 1,836,476 issued and 1,819,113 outstanding
at December 31, 1996, and 1,865,876 issued and 1,528,513
outstanding at September 30, 1997 1,836 1,866
Additional paid-in capital 3,280,920 7,058,514
Treasury stock, at cost (67,500) (227,500)
Accumulated deficit (5,797,065) (11,974,079)
----------- -----------
Total liabilities and stockholders' equity $ 5,649,795 $ 4,167,936
=========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED FINANCIAL
STATEMENTS.
3
<PAGE>
CELERITY SYSTEMS, INC.
CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1996 1997 1996 1997
---- ---- ---- ----
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues $ 433,978 $ 355,870 $ 1,733,877 $ 1,610,373
Cost of revenues 472,600 284,592 1,740,658 1,688,682
----------- ----------- ----------- -----------
Gross margin (38,622) 71,278 (6,781) (78,309)
Operating expenses 903,962 2,084,101 2,674,297 5,627,545
----------- ----------- ----------- -----------
Loss from operations (942,584) (2,012,823) (2,681,078) (5,705,854)
Interest expense (100,925) (348,739) (154,695) (502,125)
Interest income 41,634 9,314 50,297 30,965
----------- ----------- ----------- -----------
Net loss (1,001,875) (2,352,248) (2,785,476) (6,177,014)
Accretion of premiums
on preferred stock 69,543 69,543 208,631 208,629
----------- ----------- ----------- -----------
Net loss applicable
to common stock $(1,071,418) $(2,421,791) $(2,994,107) $(6,385,643)
=========== =========== =========== ===========
Primary loss per
share (Note 4): $(.61) $(1.14) $(1.57) $(2.78)
===== ====== ====== ======
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED FINANCIAL
STATEMENTS.
4
<PAGE>
CELERITY SYSTEMS, INC.
CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN TREASURY ACCUMULATED
STOCK CAPITAL STOCK DEFICIT
------ ---------- -------- -----------
<S> <C> <C> <C> <C>
Balances, December 31, 1996 $1,836 $3,280,920 $(67,500) $(5,797,065)
Grant of stock to officer (unaudited) 15 - - -
Exercise of employee stock options (unaudited) 15 1,448 - -
Acquisition of 320,000 shares of
common stock held in treasury - - (160,000) -
Accretion of premiums on preferred stock (208,629)
Issuance of bridge notes and accompanying
common stock warrants(unaudited) - 1,440,000 - -
Grant of stock options at below the
initial public offering price(unaudited) - 2,544,775
Net loss (unaudited) - - - (6,177,014)
--------- ---------- --------- -----------
Balances, September 30, 1997 (unaudited) $ 1,865 $7,058,514 $(227,500) $11,974,079
========= ========== ========= ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED FINANCIAL
STATEMENTS.
5
<PAGE>
CELERITY SYSTEMS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1996 1997
---- ----
(unaudited)
<S> <C> <C>
Net cash flows from operating activities:
Net loss $(2,785,476) $(6,177,014)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization 180,024 363,733
Compensation expense for issuance of stock options - 2,544,775
Accretion of interest on notes payable - 240,000
Provision for doubtful accounts receivable 70,831 12,068
Changes in current assets and liabilities:
Accounts receivable 2,937,599 117,958
Prepaid expenses - (25,178)
Inventory (1,150,364) 89,454
Costs in excess of billings on uncompleted
contracts (1,492) 187,749
Accounts payable (1,491,004) 821,012
Accrued expenses (9,912) 92,013
Deferred revenue - (359,970)
Interest payable 145,098 258,333
Allowance for estimated losses on uncompleted
Contracts (110,015) (578,265)
Billings in excess of costs and earnings on
uncompleted contracts, net - (21,086)
------------ ------------
Net cash used in
operating activities (2,214,711) (2,571,918)
------------ ------------
Cash flows from investing activities:
Purchases of property and equipment (215,967) (216,826)
Change in other assets 25 -
------------ ------------
Net cash used in investing activities (215,942) (216,826)
------------ ------------
Cash flows from financing activities:
Proceeds from notes payable and warrants 3,000,000 2,000,000
Principal payments on long-term debt, notes payable
and capital leases (104,841) (5,636)
Proceeds from issuance of common stock 2,533,365 1,478
Repurchase of common stock - (160,000)
Debt offering costs (338,910) (360,930)
------------ ------------
Net cash provided by
financing activities 5,089,614 1,474,912
------------ ------------
Net increase (decrease) in cash and cash equivalents 2,658,961 (1,313,832)
Cash and cash equivalents, beginning of period 485,775 2,344,666
------------ ------------
Cash and cash equivalents, end of period $3,144,736 $1,030,834
============ ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED FINANCIAL
STATEMENTS.
6
<PAGE>
CELERITY SYSTEMS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. PRESENTATION OF UNAUDITED INTERIM FINANCIAL STATEMENTS - Information in the
accompanying interim financial statements and notes to the financial
statements for the interim periods as of September 30, 1996 and 1997 and
for the three month and nine month periods then ended, is unaudited. The
accompanying interim unaudited financial statements have been prepared by
the Company in accordance with generally accepted accounting principles and
Regulation S-B. Accordingly, they do not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the nine month
period ended September 30, 1997, are not necessarily indicative of the
results that may be expected for the year ending December 31, 1997. The
condensed financial statements should be read in conjunction with the
financial statements and notes thereto included in the audited financial
statements of the Company as and for the period ended December 31, 1996.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
IMPACT OF SFAS 128 - In February 1997, the FASB issued SFAS 128, EARNINGS
PER SHARE. The Statement simplifies the standards for computing earnings
per share (EPS). Additionally, the Statement requires dual presentation of
basic and diluted EPS on the face of the income statement and requires a
reconciliation of the numerator and denominator of the diluted EPS
calculation. The Company plans to adopt the provisions of SFAS 128 for the
year ended December 31, 1998. Had the pronouncement been in effect for the
three month periods ended September 30, 1996 and 1997, basic EPS would have
been $(.89) and $(1.55), respectively. Basic EPS for the nine month
periods ended September 30, 1996 and 1997, would have been $(2.23)and
$(3.68), respectively. Diluted EPS would have been the same as primary
loss per share for all periods presented.
IMPACT OF SFAS 129 AND SFAS 130 - In February and June 1997, respectively,
the FASB issued SFAS 129, DISCLOSURE OF INFORMATION ABOUT CAPITAL
STRUCTURE, which will be effective for periods ending after December 15,
1997, and SFAS 130, REPORTING COMPREHENSIVE INCOME, which will be effective
for fiscal years beginning after December 15, 1997. These standards will
have no material impact on the Company.
3. CONTRACTS
The Company's long-term projects in Korea and Israel have expected
completion dates in the fourth quarter of 1997. The Korean project began
its systems reliability period in September 1997. The Company met its
final milestones under the Israel contract during the fourth quarter of
1997 and is waiting for the final acceptance by the customer.
The Company has recorded billings in excess of costs of $129,914 at
September 30, 1997 related to three short-term contracts accounted for
under the completed contract method.
4. LOSS PER SHARE
Loss per share has been computed by dividing net loss applicable to common
stock by the weighted average number of common and common equivalent shares
outstanding during each period. Common equivalent shares relating to
options and warrants issued during the twelve month period preceding the
filing of a registration statement at a price below the estimated offering
price have been calculated using the treasury stock method assuming that
the options were outstanding during each period presented and
7
<PAGE>
NOTES TO CONDENSED FINANCIAL STATEMENTS, CONTINUED
that the fair value of the Company's common stock during each period was
equal to the assumed initial public offering price of $7.50 per share.
Remaining warrants, options, and preferred stock granted prior to the one
year period before the initial public offering were considered common stock
equivalents but were not included for purposes of calculating primary loss
per share because they were anti-dilutive.
After giving effect to the items described above, loss per common share has
been computed based on the assumed weighted average number of shares
outstanding in each period (1,903,968 and 2,293,735 shares for the nine
months ended September 30, 1996 and 1997 (unaudited), respectively, and
1,760,189 and 2,126,476 for the three months ended September 30, 1996 and
1997(unaudited), respectively).
5. STOCK OPTIONS
The Company recorded approximately $1,003,000 in non-cash compensation
expense in the third quarter of 1997 related to the award of stock options
below the initial public offering price of $7.50 per share.
6. SEGMENT INFORMATION
The Company has two reportable segments: CD-ROM and interactive video.
The CD-ROM segment includes the design, development, installation and
support of CD-ROM storage and imaging software products for business
applications. The interactive video segment products are interactive video
services hardware and software. The Company's two reportable segments
offer different products and services and market such products to different
customer bases. The two segments are managed separately because each
business requires different technology and marketing strategies. The two
segments evolved over the life of the Company and have specifically
identifiable tangible assets. The segments share certain corporate assets
and, as such, those are not specifically identified in the segment
information.
The segment information for the nine month periods ending September 30,
1996 and 1997, is as follows:
SEPTEMBER 30, SEPTEMBER 30,
1996 1997
---- ----
(unaudited) (unaudited)
REVENUES FROM EXTERNAL CUSTOMERS
CD-ROM $ 1,244,242 $ 854,430
Interactive video 489,635 755,943
----------- -----------
Total $ 1,733,877 $ 1,610,373
=========== ===========
SEGMENT LOSS
CD-ROM $ (199,342) $(1,219,452)
Interactive video (2,481,736) (4,486,402)
----------- -----------
Total $(2,681,078) $(5,705,854)
=========== ===========
SEGMENT ASSETS
CD-ROM Not applicable $ 478,822
Interactive video Not applicable 2,039,897
Total Not applicable $ 2,518,719
===========
8
<PAGE>
NOTES TO CONDENSED FINANCIAL STATEMENTS, CONTINUED
The change in the asset balance at September 30, 1997, for the interactive
video segment when compared to the December 31, 1996 segment information is
approximately $393,000. This change is due to the fact that billings
exceeded costs on the Company's ongoing projects at September 30, 1997,
whereas the costs exceeded billings at December 31, 1996 in the amount of
$187,749. This also led to the segment's increase in accounts receivable
of $130,000 at September 30, 1997. There was a decrease in accounts
receivable in the CD-ROM segment between December 31, 1996 and September
30, 1997 of approximately $45,000.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. The segment information
provided contains allocations of certain corporate assets and expenses
which are shared by each of the segments. The allocations are generally
based on a 25%/75% basis for the CD-ROM and interactive video segments,
respectively. Neither of the segments have financial operations and,
therefore, there are no material amounts of interest revenue or expense
generated. There was a net interest expense for the Company of $104,398
and $471,160 for the nine month periods ended September 30, 1996 and 1997,
respectively. The segment loss amounts do not contain amounts attributable
to the Company's net interest expense or accretion of premiums on preferred
stock.
7. SUBSEQUENT EVENT
On November 7, 1997, the Company closed an initial public offering of
2,000,000 shares of common stock at the purchase price of $7.50 per share,
which resulted in gross proceeds to the Company of $15,000,000. A
portion of the proceeds of the offering was used to repay indebtedness
incurred in the Company's 1996 and 1997 private placements, and the balance
is intended to be used for the hiring of necessary personnel throughout the
Company, to fund the Company's sales and marketing efforts, and for working
capital and general corporate purposes. The repayment of the Company's debt
resulted in the recognition of an extraordinary loss on the early
extinguishment of debt related to the 1997 private placement in the amount
of $1,080,000. The Company also wrote off the unamortized debt offering
costs which approximated $300,000. In addition, upon the effective date of
the offering, the Company's preferred stock converted into common stock, and
common stock warrants related to the Company's November 1995 issuance of
promissory notes in the amount of $934,500 expired.
9
<PAGE>
THIS QUARTERLY REPORT ON FORM 10-QSB CONTAINS FORWARD LOOKING STATEMENTS
THAT INVOLVE CERTAIN RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS
COULD DIFFER MATERIALLY FROM THE RESULTS DISCUSSED IN THE FORWARD LOOKING
STATEMENTS.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion should be read in conjunction with the financial
statements and notes thereto and other financial information appearing elsewhere
in this Form 10-QSB. Statements in this Management's Discussion and Analysis or
Plan of Operation and elsewhere in this Form 10-QSB that are not statements of
historical or current fact constitute "forward-looking statements." Such
forward-looking statements involve known and unknown risks, uncertainties, and
other factors including those set forth herein that could cause the actual
results of the Company to be materially different from the historical results or
from any future results expressed or implied by such forward-looking statements.
In addition to statements which explicitly describe such risks and
uncertainties, prospective investors are urged to consider statements labeled
with the terms "believes," "belief," "expects," "intends," "anticipates," or
"plans" to be uncertain and forward-looking.
OVERVIEW
The Company has focused most of its sales, marketing, and research and
development efforts in 1997 on its interactive video segment and intends to
continue to focus primarily on such segment in the future. Sales of interactive
video products accounted for 28% and 47% of revenues for the year ended December
31, 1996 and the nine months ended September 30, 1997, respectively.
Commencing August 1996, in connection with a change of management, and
until approximately January 1997, when Kenneth D. Van Meter, the Company's
current Chief Executive Officer, began his employment with the Company, the
Company suspended substantially all of its interactive video sales efforts to
permit new management to formulate a new business plan. Accordingly, the
period-to-period comparison set forth below may not be meaningful and many not
necessarily be indicative of the results that may be expected for future
periods.
The Company entered into one short-term interactive video contract in 1996
and two others in 1997. Due to the short-terms nature of these projects,
revenues from these contracts are recorded by the completed contract method of
accounting, which provides for recognition of revenues and related costs upon
completion of each contract. Costs in excess of billings on these uncompleted
short-terms contracts are reflected as current assets, while billings in excess
of costs are reflected as current liabilities. These short-term contracts have
not been completed and, accordingly, revenues have not yet been recognized.
The Company's 1996 short-term contract was received from IBM Taiwan
Corporation. The value of this contract is approximately $650,000, of which
approximately $125,000, relating to separate deliverable items, was recognized
in 1996. The Company anticipates recognizing revenues of approximately $525,000
upon completion of the project, which is expected to occur during the fourth
quarter of 1997. The Company has capitalized approximately $474,000 in costs
associated with the Taiwan project and anticipates that it will incur an
additional $15,000 in costs before the project's completion.
10
<PAGE>
The Company has also entered into short-term contracts with the Guangdong
Public Telecommunications Authority ("GPTA") and the Beijing Telecom Authority
("BTA") in 1997. The value of the GPTA contract is approximately $1,400,000.
The Company anticipates recognizing all of the revenues relating to the GPTA
contract upon the project's completion, which is expected to occur in the fourth
quarter of 1997. The Company has capitalized approximately $716,000 in costs
associated with the GPTA project and estimates that it will incur an additional
$65,000 in costs before the completion of the project. The value of the BTA
contract is approximately $712,000. The Company anticipates recognizing all of
the revenues relating to the BTA contract upon the project's completion, which
is estimated to occur in the first quarter of 1998. The Company has capitalized
approximately $317,000 in costs associated with the BTA project and anticipates
incurring an additional $88,000 in costs before its completion.
During the nine months ended September 30, 1997, the Company had two
interactive video customers that represented 42% of its revenues and two CD-ROM
customers that represented 24% of its revenues. During the same period in 1996,
the Company had one interactive video customer and one CD-ROM customer that
represented 19% and 49%, respectively, of its revenues.
Currently, the principal markets for the Company's interactive video
products are Korea, Israel, Taiwan, and China. Export sales for the nine
month periods ended September 30, 1997 and 1996 were approximately $719,000
(or 42% of revenues) and approximately $736,000 (or 45% of revenues),
respectively. Sales to Korean customers represented 2% and 34% of revenues,
while sales to an Israeli customer represented 20% and 7% of revenues, for
the periods ended September 30, 1997 and 1996, respectively. All revenues
associated with the Company's long-term Korean and Israeli projects have been
previously recognized by the Company.
There are inherent risks associated with foreign sales, including the
difficulty of enforcing agreements against foreign-based customers, political
and economic instability, shipping delays, foreign taxes, and export
restrictions.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1996
REVENUES. Revenues for the three months ended September 30, 1997 were
approximately $356,000 as compared to approximately $434,000 for the same period
in 1996.
There were no revenues attributable to the interactive video segment for
the three months ended September 30, 1997 as compared to approximately $28,000
of such revenues for the same period in 1996. During the three month period
ended September 30, 1997, the Company was engaged in the completion of its
long-term projects in Korea and Israel, as well as continued work on its three
short-term contracts in Taiwan and China. The Korean project passed its systems
acceptance test and is currently in the reliability period of the contract. The
Company anticipates the completion of the project during the fourth quarter of
1997. The Company has completed the last milestones on the Israeli project
which were the delivery and acceptance of the set top boxes and the systems
acceptance test. The Company anticipates final acceptance of the system by the
11
<PAGE>
customer during the fourth quarter of 1997. There are no additional revenues to
be recognized on the long-term contracts, as those have been accounted for under
the percentage of completion method, and the Company recognized losses on the
contracts in prior periods. Revenues for the short-term contracts will be
recognized upon completion.
Revenues during the three month period ended September 30, 1996 were due to
the sale of a small number of set top box to the Company's Israeli customer.
The Company's efforts were devoted almost entirely to the completion of its
long-term contracts during that period.
Revenues from the CD-ROM segment were approximately $356,000 for the three
months ended September 30, 1997 as compared to approximately $406,000 for the
same period in 1996. The decrease is due to the Company's focus on sales of its
Mediator and CD Workware products rather than the VCD Manager and VCD Writer
products. The CD Workware products have not generated the sales that were
anticipated, while the Mediator products' largest user was the U.S. Navy, which
changed its specifications for the product and has not yet placed any orders in
1997.
COSTS OF REVENUES. Costs of revenues for the three months ended September
30, 1997 were approximately $285,000, or 80% of revenues, as compared to
approximately $473,000, or 109% of revenues for such segment for the same
period in 1996. The decrease was due primarily to a decrease in materials
costs of approximately $126,000 for the period in 1997 as compared to the same
period in 1996. The Company's gross margin was approximately $71,000 for the
three months ended September 30, 1997 as compared to a loss of approximately
$39,000 for the same period in 1996.
Costs of revenues for the interactive video segment for the three months
ended September 30, 1997 were approximately $115,000 as compared to
approximately $182,000 for the same period in 1996. Interactive video costs of
revenues consist primarily of engineering labor, materials costs and other
incidental costs involved in the Company's efforts to complete its existing
contracts. Materials costs and engineering labor costs for the period in 1997
decreased by approximately $38,000 and $16,000, respectively, as compared to the
same period in 1996.
Costs of revenues for the CD-ROM segment for the three months ended
September 30, 1997 were approximately $170,000, or 48% of revenues for such
segment, as compared to $290,000, or 72% of such revenues for the same period
in 1996. The decrease in costs of revenues on a percentage basis during such
period in 1997 was principally due to the lower percentage of hardware
revenues as compared to the same period in 1996. CD-ROM software revenues do
not entail any significant materials costs. Hardware sales for the three
months ended September 30, 1997 were approximately $128,000, or
approximately 36% of sales as compared to $222,000, or approximately 67% of
sales for the same period in 1997. Materials costs were approximately
$104,000 in the three month period of 1997 as compared to $191,000 for the
same period in 1996, which was a direct result of the decrease in hardware
revenues. The remainder of the decrease in costs of revenues between the two
periods was due to a decrease in engineering labor costs.
12
<PAGE>
As a result of the factors discussed above, the Company's gross margins for
the CD-ROM segment were approximately $186,000 and $116,000 for the three month
periods ended September 30, 1997 and 1996, respectively.
OPERATING EXPENSES. Operating expenses for the three months ended
September 30, 1997 were approximately $1,932,000 as compared to approximately
$808,000 for the same period in 1996.
Operating expenses for the interactive video segment were approximately
$1,449,000 for the three months ended September 30, 1997 as compared to
approximately $642,000 for the same period in 1996. The increase in operating
expenses was principally due to approximately $753,000 of non-cash charges
allocated to the interactive video segment relating to the issuance of stock
options during the quarter at an exercise price below the initial public
offering price of $7.50 per share. In addition, the amount of administrative
wages allocated to the segment was approximately $37,000 greater during the
period in 1997 than during the same period in 1996 due to the addition of
corporate personnel.
Operating expenses for the CD-ROM segment were approximately $483,000 for
the three months ended September 30, 1997 as compared to approximately $166,000
for the same period in 1996. The increase was principally due to approximately
$251,000 of non-cash compensation charges allocated to the CD-ROM segment
relating to the issuance of stock options during the first half of 1997 at an
exercise price below the initial public offering price of $7.50 per share. In
addition, research and development costs increased by approximately $43,000 for
the three months ended September 30, 1997 as compared to the same period in
1996.
NET LOSS. As a result of the factors discussed above, net loss for the
three months ended September 30, 1997 was approximately $2,352,000 as compared
to approximately $1,002,000 for the same period in 1996.
Net loss for the interactive video segment was approximately $1,678,000 for
the three months ended September 30, 1997 as compared to approximately $836,000
for the same period in 1996. The increased loss was due to the increase in
operating expenses, as revenues for the segment were insignificant in both
periods. The increase in operating expenses was due mainly to the non-cash
compensation allocated to the segment, as discussed above.
Net loss for the CD-ROM segment was approximately $335,000 for the three
months ended September 30, 1997 as compared to net income for the same period
in 1996 of approximately $117,000. The loss was due to decreased revenues and
increased operating expenses. The increase in operating expenses was due mainly
to the non-cash compensation allocated to the segment, as discussed above.
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1996
REVENUES. Revenues for the nine months ended September 30, 1997 were
approximately $1,610,000 as compared to approximately $1,734,000 for the same
period in 1996.
13
<PAGE>
Revenues for the interactive video segment were approximately $756,000 for
the nine months ended September 30, 1997 as compared to approximately $490,000
of such revenues for the same period in 1996. The increase was principally due
to the recognition of approximately $560,000 of revenues relating to payments
received from En K. Revenues were recognized under the Company's agreements
with En K in late 1996 through June 1997. The Company also recognized revenues
on the sale of set top boxes to its Israeli customer in 1997 approximating
$120,000. Revenues for the same period in 1996 related to progress on the
Company's two existing long-term interactive video contracts.
Revenues from the CD-ROM segment were approximately $854,000 for the nine
months ended September 30, 1997 as compared to approximately $1,244,000 for the
same period in 1996. As discussed above, the decrease is due primarily to the
Company's decision to focus on sales of its Mediator and CD Workware products
rather than the VCD Manager and VCD Writer products.
COSTS OF REVENUES. Costs of revenues for the nine months ended September
30, 1997 were approximately $1,689,000, or 105% of revenues, as compared to
approximately $1,741,000, or 104% of revenues, for the same period in 1996.
Higher labor costs in 1997 were offset by lower direct materials costs. The
Company's negative gross margin was approximately $78,000 for nine months ended
September 30, 1997 as compared to approximately $7,000 for the same period in
1996.
Costs of revenues for the interactive video segment for the nine months
ended September 30, 1997 were approximately $1,022,000, or 135% of revenues for
such segment, as compared to approximately $882,000, or 180% of such revenues
for the same period in 1996. The decrease in costs of revenues as a percentage
of revenues was principally due to the recognition of revenues generated from
the En K licensing agreements, which required no [materials] costs. Materials
costs were approximately $90,000 for the nine months ended September 30, 1997 as
compared to approximately $338,000 for the same period in 1996. In addition,
any materials costs which were attributable to the Israeli or Korean project
were accounted for as an offset to the reserve for estimated losses on the
uncompleted contracts rather than being recognized as an expense during the nine
months ended September 30, 1997. The decrease in materials costs between the
two periods was offset by an increase in labor costs of approximately $390,000.
The increase was due to an increase in engineering personnel for the nine months
ended September 30, 1997. The interactive video segment had a negative gross
margin of approximately $266,000 for the nine months ended September 30, 1997 as
compared to approximately $392,000 for the same period in 1996.
Costs of revenues for the CD-ROM segment for the nine months ended
September 30, 1997 were approximately $667,000, or 78% of revenues for such
segment, as compared to approximately $859,000, or 69% of such revenues, for the
same period in 1996. Materials costs for the nine months ended September 30,
1997 were $352,000 as compared to $558,000 for the same period in 1996,
representing a decrease of $206,000. The decrease in materials costs resulted
from the decrease in segment hardware revenues of $313,000 between the two
periods. Direct labor costs remained consistent between the two periods. There
were no material costs of revenues associated with software sales during either
of the periods.
14
<PAGE>
The Company's gross margin for the CD-ROM segment was approximately
$187,000 for the nine months ended September 30, 1997 as compared to
approximately $386,000 for the same period in 1996.
OPERATING EXPENSES. Operating expenses for the nine months ended September
30, 1997 were approximately $5,260,000 as compared to approximately $2,493,000
for the same period in 1996.
Operating expenses for the interactive video segment were approximately
$3,945,000 for the nine months ended September 30, 1997 as compared to
approximately $1,953,000 for the same period in 1996. The increase was
principally due to approximately $1,910,000 in non-cash compensation expense
allocated to the interactive video segment related to the issuance of stock
options during the nine month period ended September 30, 1997 at an exercise
price below the initial public offering price of $7.50 per share. In addition,
the interactive video segment incurred costs of approximately $291,000 in
consulting fees, contract labor and recruiting fees [to obtain the necessary
resources to continue to advance the Company in its technical endeavors], as
compared to $64,000 for the same period in 1996. These increased expenses were
partially offset by decreases in travel costs and sales and marketing expenses
of approximately $137,000 between the two periods.
Operating expenses for the CD-ROM segment were approximately $1,315,000 for
the nine months ended September 30, 1997 as compared to approximately $540,000
for the same period in 1996. The increase was principally due to approximately
$636,000 in non-cash compensation expenses allocated to the CD-ROM segment
relating to the issuance of stock options during the nine months ended September
30, 1997 at an exercise price below the initial public offering price of $7.50
per share. The increase was also due in part to expenses incurred in hiring
personnel and retaining consultants and contractors of approximately $97,000 for
the nine months ended September 30, 1997 as compared to $21,000 of such expenses
for the same period in 1996.
NET LOSS. As a result of the factors discussed above, net loss for the
nine months ended September 30, 1997 was approximately $6,177,000 as compared to
$2,785,000 for the same period in 1996.
Net loss for the interactive video segment was approximately $4,486,000 for
the nine months ended September 30, 1997 as compared to approximately $2,482,000
for the same period in 1996. The increase was principally due to increased
operating expenses.
Net loss for the CD-ROM segment was approximately $1,219,000 for the nine
months ended September 30, 1997 as compared with approximately $199,000 for the
same period in 1996. The increased loss was due to higher operating expenses as
well as a decrease in revenues in 1997.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception in January 1993 and through September 30, 1997 the
Company had an accumulated deficit of approximately $11,974,100. The Company
expects to continue to incur operating losses through at least the third
quarter of 1998 as it continues to implement its plan to add staff and other
resources and to increase its sales efforts. In addition, new products,
including the T6000 digital set top box and the CTL 8500 server, will not be
achieving any significant sales until at least such third quarter. There can
be no assurance, however, as to the receipt or timing of revenues from
operations.
During the nine months ended September 30, 1997 and September 30, 1996,
the Company satisfied its cash requirements
15
<PAGE>
principally from private sales of equity and debt securities and, to a lesser
extent, from cash flows from operations.
In June and July 1996, the Company consummated a private placement of units
consisting of Common Stock, notes, and warrants (the "1996 Placement"). The net
proceeds of approximately $5,404,300 from the 1996 Placement were used to pay
overdue trade accounts payable, fund the Company's long-term projects, and fund
the Company's working capital needs.
In August 1997, the Company consummated a private placement (the "Bridge
Financing") in which it issued units consisting in the aggregate of
$2,000,000 principal amount of notes (the "Bridge Notes") and 320,000
warrants, each to purchase one share of Common Stock (the "Bridge Warrants")
at an exercise price of $3.00 per share. The Company received net proceeds
of approximately $1,736,500 from the Bridge Financing. The effective
interest rate of the Bridge Notes was in excess of 300%, and the Company was
required to recognize non-cash interest expense and loss on early
extinguishment of debt of approximately $1,440,000 upon the repayment of the
Bridge Notes upon consummation of the Company's initial public offering in
November 1997. In addition, the Company was required to recognize non-cash
expenses of approximately $469,000 consisting of the write-off of previously
capitalized expenses incurred in connection with the Bridge Financing and the
private placement consummated in 1996. In connection with the Bridge
Financing, the Company repurchased 240,000 shares of Common Stock from a
former officer and 80,000 shares of Common Stock from a director of the
Company for aggregate consideration of $160,000 ($0.50 per share).
Additionally, the Company entered into certain capital leases for various
office equipment. The outstanding principal balance under capital lease
obligations at September 30, 1997 amounted to approximately $25,000, all of
which is guaranteed by a former officer and was extinguished using a portion
of the net proceeds of the initial public offering.
The Company had working capital of approximately $832,600 at September
30, 1997 compared with working capital of $2,105,100 at December 31, 1996, a
decrease of approximately $1,272,500. Cash decreased by approximately
$1,313,800 between the two periods, primarily as a result of the Company's
net loss for the nine month period ended September 30, 1997.
The Company had net cash used in operating activities of approximately
$2,571,900 during the nine months ended September 30, 1997 as compared to
approximately $2,214,700 for the same period in 1996. The use of cash during
the nine-month period in 1997 is primarily the result of the Company's net
loss of approximately $6,177,000, and adjustments for non-cash charges and
changes in working capital components. The use of cash during the nine-month
period ended September 30, 1996 was primarily the result of the Company's net
loss of approximately $2,785,500 and changes in working capital components.
The Company had net cash used in investing activities for each of the
nine month periods ended September 30, 1997 and 1996 of approximately
$215,000 for the purchase of fixed assets.
The Company had net cash provided by financing activities in the nine
months ended September 30, 1997 of approximately $1,474,900 as compared to
approximately $5,089,600 for the same period in 1996. The Company also
incurred $360,930 in debt offering costs related to the offering during the
nine month period ended September 30, 1997.
16
<PAGE>
The Company's accounts receivable turnover ratio for the nine months
ended September 30, 1997 was 1.34 as compared to 0.65 for the same period in
1996. The large decrease in the average receivable balance was due
principally to collections during the nine-month period in 1996 on large
accounts that had been outstanding at the end of 1995. The long-terms
projects have retentions negotiated in the contracts that allow the customer
to hold a percentage of the billings until completion. Due to the inability
of the Company to complete those projects, the receivable turnover was
adversely affected in both periods.
The inventory turnover ratio for the nine months ended September 30, 1997
was 0.95 as compared to 1.62 for the same period in 1996. The nature of the
Company's interactive video sales and production process requires that
inventory be on hand for extended periods of time which adversly affected the
inventory turnover ratio.
The Company has no existing lines of credit or other financing arrangements
with lending institutions.
In November 1997, the Company consummated its initial public offering of
2,000,000 shares of common stock at a purchase price of $7.50 per share (the
"IPO"). The company realized net proceeds of approximately $12,648,800 from
the IPO, of which approximately $5,446,000 was used to repay the principal
amount of the 1996 Notes and the Bridge Notes, together with accrued interest
thereon. The Company believes that the net proceeds of the Offering,
together with funds generated from operations, will be sufficient to satisfy
its operating and capital requirements for the next 18 months. Such belief
is based upon certain assumptions, and there can be no assurance that such
assumptions are correct. The Company may be required to raise substantial
additional capital in the future in order to carry out its business plan. In
addition, contingencies may arise which may require the Company to obtain
additional capital. Accordingly, there can be no assurance that such
resources will be sufficient to satisfy the Company's capital requirements.
There can be no assurance that the Company will be able to obtain any such
required additional capital on a timely basis, on favorable terms, or at all.
17
<PAGE>
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
On July 15, 1997, the Company, through Hampshire Securities
Corporation, acting as placement agent, commenced the offer of 20
units of its securities, each consisting of one 10% Note in the
principal amount of $100,000 and one four-year Warrant to purchase
16,000 shares of common stock at an exercise price equal to $3.00
per share, at $100,000 per unit ($2,000,000 total) solely to
accredited investors. At the closing of such offering on August 8,
1997, Hampshire Securities Corporation received, for its services, a
placement fee of 10% of the gross proceeds from the sale of such
securities and reimbursement of certain other expenses.
On July 15, 1997, an option to purchase 200 shares of common stock
was granted to an employee of the Company, pursuant to the Company's
1995 Stock Option Plan.
On July 18, 1997, in connection with his employment agreement,
Kenneth D. Van Meter, the Company's President and Chief Executive
Officer, was granted an option to purchase 230,000 shares of common
stock.
On July 27, 1997, an option to purchase 20,000 shares of common
stock was granted to an officer of the Company.
On August 1, 1997, in connection with his employment agreement,
Kenneth D. Van Meter purchased, for nominal consideration, 15,000
shares of common stock.
On August 6, 1997, pursuant to stockholder approval, the Company
effected a one-for-two-and-one-half reverse stock split of its
common stock. The foregoing numbers of shares give effect to such
stock split.
On August 13, 1997, the Company filed a Registration Statement on
Form SB-2 (Registration No. 333-33509 (the "Registration Statement"))
registering the sale in the Company's initial public offering of up
to 2,300,000 shares of its common stock, par value $0.001 per share
(the "Common Stock") with an aggregate offering price of
$17,250,000; 200,000 underwriter's warrants, each to purchase one
share of Common Stock (the "Warrants"), with an aggregate offering
price of $200; and 200,000 shares of Common Stock underlying the
Warrants, with an aggregate offering price of $1,800,000. The
Registration Statement was declared effective on November 4, 1997.
On November 7, 1997, the Company consummated its initial public
offering and sold, through Hampshire Securities Corporation, acting
as underwriter, 2,000,000 shares of Common Stock at $7.50 for an
aggregate purchase price of $15,000,000. The Company also issued
168,000 Warrants to Hampshire at $0.001 each for an aggregate
purchase price of $168.
In connection with such offering, the Company incurred $1,162,500
for underwriting discounts and commissions, $450,000 of expenses
paid to or for the underwriter, and $738,735 of other expenses for
total expenses of $2,351,235. None of such expenses represented
direct or indirect payments to directors, officers or persons owning
ten percent or more of any class of equity securities of the issuer
or to any affiliate of the issuer.
From November 4, 1997, the effective date of the Registration
Statement, through September 30, 1997, the Company did not receive
any of the proceeds of the initial public offering. From such
effective date through December 18, 1997, approximately $5,450,000
of the net proceeds of such offering was applied to repay
indebtedness, $40,000 was applied to payments under a termination
agreement with a former officer, $25,000 was applied to the payment
of additional enigneering personnel, $252,000 was applied to
directors' and officers' liability insurance and $1,055,000 was
applied to working capital. Approximately $65,000 of such working
capital represented payroll for officers of the Company. The balance
of the net proceeds have been temporarily invested in a commercial
bank investment account; however, it is anticipated that a portion
of such funds will be invested in short-term instruments.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On August 6, 1997, the Company held a special meeting of the
stockholders of the Company for the consideration of (i) the Company's
proposal to reincorporate in the State of Delaware, (ii) an amendment
to the Company's Certificate of Incorporation to increase the
authorized capital stock of the Company to include 3,000,000 of "blank
check" preferred stock, (iii) an amendment to the Company's
Certificate of Incorporation to effectuate a one-for-two-and-one-half
reverse stock split of the Company's common stock, (iv) the
adoption of the Company's 1997 Stock Option Plan, and (v) the
purchase by the Company of an aggregate of 320,000 shares of common
stock from a former officer and director and a current director, each
of whom was a principal stockholder, for $0.50 per share.
All of the shares present in person or by proxy and entitled to vote at
the meeting, consisting of 3,958,300 shares of common stock, 927,607
shares of Series A Preferred Stock and 388,291 shares of Series B
Preferred Stock were voted in favor of proposals (i), (iii) and (iv)
above. All of such shares of common stock, 766,843 shares of Series B
Preferred Stock and 308,995 shares of Series A Preferred Stock were
voted in favor of proposal (ii) above, and no shares were voted against
such proposal. Proposal (v) received the unanimous vote of all such
shares of Series A Preferred Stock and Series B Preferred Stock present
and entitled to vote at the meeting. The foregoing numbers of shares of
common stock do not give effect to the Company's reverse stock split.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 11 Statement re: Computation of Per Share Earnings
Exhibit 27 Financial Data Schedule
18
<PAGE>
SIGNATURE
In accordance with the requirements of the Securities Exchange Act of 1934,
the registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Dated: December 19, 1997
CELERITY SYSTEMS, INC.
(Registrant)
By: /s/ Kenneth D. Van Meter
-------------------------------------
Kenneth D. Van Meter
President and Chief Executive Officer
and Chairman of the Board
(Principal Executive Officer)
By: /s/ Thomas E. Welch
-------------------------------------
Thomas E. Welch
Controller
(Principal Financial Officer)
19
<PAGE>
EXHIBIT 11: STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
NINE MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
<S> <C> <C>
WEIGHTED AVERAGE SHARES OUTSTANDING: (1) Common equivalent shares related to
Wtd. Avg. Shares outstanding Jan-Sep 1,734,098 the options and warrants issued within the
Common equivalent shares outstanding 559,637 (1) one year period prior to the filing of the
--------- registration statement.
2,293,735 (2)
----------
(2) Options and warrants issued in the
NET INCOME APPLICABLE TO COMMON STOCK: periods preceding the one year prior to
Net income (loss) ($6,177,014) filing the registration statement are not
Accretion of premiums on preferred stock (208,629) included for purposes of the calculation
---------- because they are antidilutive.
($6,385,643)
----------
PRIMARY EPS: ($2.78)
----------
NINE MONTHS ENDED SEPTEMBER 30, 1996
WEIGHTED AVERAGE SHARES OUTSTANDING:
Wtd. Avg. Shares outstanding Jan-Sep 1,344,331
Common equivalent shares outstanding 559,637 (1)
1,903,968 (2)
----------
NET INCOME APPLICABLE TO COMMON STOCK:
Net income (loss) ($2,785,476)
Accretion of premiums on preferred stock (208,629)
----------
($2,994,105)
----------
PRIMARY EPS: ($1.57)
----------
THREE MONTHS ENDED SEPTEMBER 30, 1997
WEIGHTED AVERAGE SHARES OUTSTANDING:
Wtd. Avg. Shares outstanding July-Sep 1,566,839
Common equivalent shares outstanding 559,637 (1)
2,126,476 (2)
----------
NET INCOME APPLICABLE TO COMMON STOCK:
Net income (loss) ($2,352,248)
Accretion of premiums on preferred stock (69,543)
----------
($2,421,791)
----------
PRIMARY EPS: ($1.14)
----------
THREE MONTHS ENDED SEPTEMBER 30, 1996
WEIGHTED AVERAGE SHARES OUTSTANDING:
Wtd. Avg. Shares outstanding July-Sep 1,200,552
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Common equivalent shares outstanding 559,637 (1)
1,760,189 (2)
----------
NET INCOME APPLICABLE TO COMMON STOCK:
Net income (loss) ($1,001,875)
Accretion of premiums on preferred stock (69,543)
----------
($1,071,418)
----------
PRIMARY EPS: ($0.61)
----------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 1,031
<SECURITIES> 0
<RECEIVABLES> 1,150
<ALLOWANCES> 567
<INVENTORY> 1,236
<CURRENT-ASSETS> 2,876
<PP&E> 1,398
<DEPRECIATION> 561
<TOTAL-ASSETS> 4,168
<CURRENT-LIABILITIES> 6,335
<BONDS> 0
0
2,955
<COMMON> 2
<OTHER-SE> (5,143)
<TOTAL-LIABILITY-AND-EQUITY> 4,168
<SALES> 1,610
<TOTAL-REVENUES> 1,610
<CGS> 1,689
<TOTAL-COSTS> 7,316
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 502
<INCOME-PRETAX> (6,177)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,177)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,177)
<EPS-PRIMARY> (2.78)
<EPS-DILUTED> (2.78)
</TABLE>
