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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 4, 1999
REGISTRATION NO.
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
TO
REGISTRATION STATEMENT ON FORM S-3
UNDER
THE SECURITIES ACT OF 1933
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CELERITY SYSTEMS, INC.
(Exact Name of Registrant as Specified in its Charter)
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DELAWARE 52-2050585
(State or jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
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1400 CENTERPOINT BOULEVARD
KNOXVILLE, TENNESSEE 37932
(423) 539-5300
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
KENNETH D. VAN METER, PRESIDENT
1400 CENTERPOINT BOULEVARD
KNOXVILLE, TENNESSEE 37932
(423) 539-5300
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent For Service)
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COPIES TO:
KENNETH R. KOCH, ESQ.
SQUADRON, ELLENOFF, PLESENT & SHEINFELD, LLP
551 FIFTH AVENUE
NEW YORK, NEW YORK 10176
(212) 661-6500 / (212) 697-6686 (FAX)
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: From time to time after the
effective date of this Registration Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
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CALCULATION OF REGISTRATION FEE
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PROPOSED PROPOSED
MAXIMUM MAXIMUM
AMOUNT TO OFFERING AGGREGATE
TITLE OF EACH CLASS OF BE PRICE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PER SHARE PRICE REGISTRATION FEE
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Common Stock, par value $.001 per share, issuable
upon conversion of the outstanding principal
amount of, and other amounts due under, the
Company's 9% Convertible Debentures due 2001
(the "Debentures"). 721,665(1)(2) $1.00 $721,665 $201
Common Stock, par value $.001 per share, issuable
upon the exercise of certain outstanding
warrants issued on April 27, 1999 and expiring
on April 26, 2002 (the "Warrants"). 100,000(1) $1.00 $100,000 $28
Common Stock, par value $.001 per share 463,376(1) $1.00 $463,376 $129
Total Common Stock, par value $.001 per share 1,285,041 $1.00 $1,285,041 $358(3)
</TABLE>
(1) Determined pursuant to Rule 457(C) under the Securities Act of 1933, as
amended, on the basis of fluctuating market prices, solely for the purpose
of calculating the registration fee.
(2) Pursuant to Rule 416 of the Securities Act of 1933, as amended, the
Registrant hereby registers such additional shares as may be issuable
pursuant to certain anti-dilution provisions of the Debentures.
(3) Of such registration fees, $151 has been previously paid.
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission acting pursuant to said Section 8(a)
may determine.
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SUBJECT TO COMPLETION DATED AUGUST 4, 1999
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
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PROSPECTUS
CELERITY SYSTEMS, INC.
1400 CENTERPOINT BOULEVARD
KNOXVILLE, TENNESSEE 37932
(423) 539-5300 (PHONE)
(423) 539-3502 (FAX)
1,285,041 SHARES OF COMMON STOCK
Certain stockholders of Celerity Systems, Inc. are offering and selling up
to 1,285,041 shares of the Company's common stock under this prospectus. Of such
shares, the Company is also offering 721,665 shares of common stock that are or
may be issuable upon conversion of the outstanding principal amount of, and
interest and other amounts due under, the Company's $600,000 principal amount of
Convertible Debentures due 2001 and 100,000 shares of common stock that are or
may be issuable upon exercise of outstanding warrants of the Company issued
April 27, 1999 and expiring on April 26, 2002. See the "Plan of Distribution" on
page 17.
The Company will not receive any proceeds from the sale of the common stock
by the selling stockholders or upon conversion of the Convertible Debentures.
The Company will receive $1.00 per share upon exercise of the warrants.
Information concerning the selling stockholders may change from time to time
and will be set forth in supplements to this prospectus.
Nasdaq SmallCap Market Symbol--"CLRT"
On July 26, 1999, the closing bid price of the common stock as reported by
the Nasdaq SmallCap Market was $1.063.
SEE "RISK FACTORS" BEGINNING ON PAGE 3 FOR A DISCUSSION OF CERTAIN MATTERS
THAT SHOULD BE CONSIDERED BY POTENTIAL INVESTORS.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
You should read all of this prospectus, especially the section "Risk
Factors" starting on page 3, and the current public information and audited
financial statements described in "Where You Can Find More Information" on page
18 of this prospectus, before deciding whether to purchase the common stock
offered in this prospectus.
THE DATE OF THIS PROSPECTUS IS AUGUST , 1999.
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SUMMARY OF THE OFFERING
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Securities Offered.............. 1,285,041 shares of the Company's common stock. Of such
shares, the Company is also offering 721,665 shares of
common stock that are or may be issuable upon conversion
of the outstanding principal amount of, and interest and
other amounts due under, the Company's $600,000 principal
amount of Convertible Debentures due 2001 and 100,000
shares of common stock that are or may be issuable upon
exercise of outstanding warrants of the Company issued
April 27, 1999 and expiring on April 26, 2002.
Use of Proceeds................. The Company will not receive any of the proceeds from the
sale of the common stock offered by the Selling
Stockholders or upon conversion of the Convertible
Debentures. The Company will receive $1.00 per share upon
exercise of the warrants.
Risk Factors.................... The securities offered hereby involve a high degree of
risk. See "RISK FACTORS" on page 3.
Offering Price.................. All or part of the shares of common stock offered hereby
may be sold from time to time in amounts and on terms to
be determined by the Selling Stockholders at the time of
sale.
Nasdaq Trading Symbol........... "CLRT"
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RISK FACTORS
AN INVESTMENT IN THE SHARES OF COMMON STOCK OFFERED BY THIS PROSPECTUS IS
SUBJECT TO MANY RISKS. WE SUMMARIZE SOME OF THE MOST SERIOUS RISKS BELOW. THE
COMPANY IS ALSO SUBJECT TO MORE GENERAL RISKS DESCRIBED IN THE SECTION "SPECIAL
NOTE REGARDING FORWARD LOOKING STATEMENTS" BEGINNING ON PAGE 18. YOU SHOULD READ
AND UNDERSTAND ALL OF THE RISK FACTORS BEFORE MAKING A DECISION TO INVEST.
NEED FOR ADDITIONAL FINANCING
As of March 31, 1999, we had cash and cash equivalents of approximately
$55,000 and a negative working capital of approximately $647,000. Our cash and
working capital positions have declined since that date, and we are dependent
upon the receipt of additional financing in order to continue as a viable
entity.
In the first quarter of 1999, we sold $600,000 aggregate principal amount of
convertible debentures in a private offering. In addition, in the second quarter
of 1999, we received approximately $550,000 in two debt offerings. The net
proceeds from such financings have been and are intended to be applied to our
outstanding obligations and working capital.
The Company will not be able to continue operations without additional
financing. The receipt of any additional net proceeds will be applied to our
working capital needs and outstanding obligations. We cannot assure you that
such additional financing will be available when needed on acceptable terms, or
at all.
HISTORY OF LOSSES AND ACCUMULATED DEFICIT
We had net losses of $8,675,000 for fiscal 1997, $6,955,800 for fiscal 1998
and $1,105,400 for the quarter ended March 31, 1999. We had an accumulated
deficit of approximately $14,472,100 at December 31, 1997, $21,428,000 at
December 31, 1998 and $22,533,300 for the quarter ended March 31, 1999. Losses
have continued since March 31, 1999. We cannot assure you that the Company will
continue as a going concern or ever operate profitably. The Company may
experience fluctuations in future operating results as a result of a number of
factors, including delays in digital video product enhancements and new product
introductions. We cannot assure you that we will be able to develop commercially
successful products or that the we will recognize significant revenues from such
products.
ABILITY TO CONTINUE AS A GOING CONCERN
The report of our independent accountants with respect to our December 31,
1998 financial statements contains an explanatory paragraph regarding the
uncertainty resulting from our recurring losses, and cash flow and working
capital problems. The Company has also significantly scaled back its operations
as a result of these factors. The lack of sales or a significant financial
commitment raises substantial doubt about our ability to continue as a going
concern or to operate our business on a full-scale basis. There can be no
assurance that the Company will ever receive the funds necessary for us to
continue as a going concern or to operate our business on a full-scale basis.
LIMITED SALES; LIMITED MARKETING AND SALES EXPERIENCE
We have limited resources and limited experience in marketing and selling
our products. The Company's sales efforts are currently being supervised by our
President. We cannot assure you that we will be able to establish and maintain
adequate marketing and sales opportunities or make arrangements with others to
perform such activities.
We have not received any material new orders, other than an order in
September 1998 for $96,000 and an order in January 1999 for $1,253,000 ($13,000
of which has been recognized through the second quarter of 1999, for interactive
video projects since June 1997. We have reduced our CD-ROM segment to a
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maintenance mode of operations, although we have received a number of orders for
CD-ROM products in the fourth quarter of 1998 and continue to receive orders in
1999.
Achieving market penetration will require significant efforts to create
awareness of, and demand for, our products. Accordingly, our ability to expand
our customer base will depend upon our marketing efforts, including our ability
to establish an effective internal sales organization or strategic marketing
arrangements with others. Our failure to successfully develop marketing and
sales opportunities will have a material adverse effect on our business.
Further, we cannot assure you that such development will lead to sales of our
current or proposed products.
LACK OF DIVIDENDS
The Company has never paid any dividends on its common stock. We anticipate
that, for the foreseeable future, any earnings that may be generated from
operations will be used to support internal growth and that dividends will not
be paid to stockholders.
NECESSITY OF ATTRACTING AND RETAINING EMPLOYEES
Upon consummation of our initial pubic offering in November 1997, we
intended, subject to the availability of funds, to hire approximately 50
employees (in addition to our more than 60 then current employees) for
engineering, product development and operations; sales and marketing; and
management and administrative staff. Due, in large measure, to our inability to
realize sufficient cash flow from operations, we have been unable to implement
our hiring plans. We have reduced our workforce to approximately 19 employees,
which includes the departure of our Vice President of Sales and Marketing in
October 1998, our Controller in January 1999 and our Vice President of Business
Development in June 1999.
The Company, in 1998, did hire approximately 30 additional staff, but based
on the lack of new sales in the interactive video area, and the Company's heavy
requirement for cash related to the development and initial manufacture of the T
6000 digital set top box, the Company was required to layoff of a small number
of employees, and a larger number left the company voluntarily, especially
during the final six months of the year, resulting in a reduction of
approximately 45 staff from its peak number in July 1998.
We are in arrears in paying compensation to our employees and we will not be
able to continue to retain them if we do not obtain additional funds to pay
them.
DEPENDENCE ON KEY PERSONNEL
Our success depends to a significant extent on the performance and continued
service of senior management, particularly Kenneth D. Van Meter, Mark Cromwell
and Dennis Smith. In addition, our senior officers (with the exception of Mr.
West, who is on an extended leave of absence) joined us in 1997 and 1998 and do
not have a long-standing relationship with the Company. Our failure to retain
the services of key personnel or to attract additional qualified employees could
adversely affect the Company.
We have entered into employment agreements with Messrs. Van Meter and West.
Mr. Van Meter's employment agreement expires on January 20, 2000, unless
terminated for cause. Mr. West's employment agreement expires May 1, 2000, and
has been amended to provide for a voluntary leave of absence continuing through
the end of the term of his employment agreement. Each of Messrs. Cromwell's and
Smith's employment may be terminated by them or the Company at any time. The
Company owns and is the beneficiary of key man life insurance policies on the
life of Mr. Van Meter in the amount of $2,000,000.
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UNCERTAINTY OF TRADING OF SECURITIES ON THE NASDAQ SMALLCAP MARKET; PENNY
STOCK
The continued trading of our common stock on the Nasdaq SmallCap Market is
conditioned upon meeting certain asset, capital and surplus, earnings, and stock
price requirements. To maintain eligibility for trading, we will be required to
maintain the following:
- net tangible assets in excess of $2,000,000, market capitalization in
excess of $35,000,000 or net income (in the latest fiscal year or two of
the last three fiscal years) in excess of $500,000;
- a market value of shares held by non-affiliates of the Company in excess
of $1,000,000;
- a bid price of $1.00 per share; and
- at least 300 round lot holders of the common stock.
If we fail any of the tests, the common stock may be delisted from trading on
the Nasdaq SmallCap Market.
On April 22, 1999, the Company received a letter from Nasdaq stating that
the closing bid price of the Company's common stock during the last thirty
consecutive trade dates failed to maintain a price greater than or equal to the
$1.00 price required for listing on the Nasdaq SmallCap Market. The Company has
been provided ninety calendar days in which to comply with the minimum bid price
requirement. In addition, the Company received a letter from Nasdaq on April 21,
1999 requesting a discussion of the Company's plans to address the specific
items that led to the issuance of a "going concern" opinion in the Form 10-KSB
for fiscal 1998 by the Company's independent auditors as well as the Company's
continued compliance with the listing requirements of the Nasdaq SmallCap
Market. The Company is in the process of responding to Nasdaq concerning the
"going concern issue" and is considering several steps to address that issue and
the minimum bid price requirement, including the potential merger described
under "Recent Developments" on page 14. The Company has requested a hearing, but
such hearing has not been scheduled as of July 26, 1999. Although the Company is
attempting to respond to Nasdaq's concerns, no assurance can be given that the
Company will be successful in meeting the Nasdaq SmallCap listing requirements.
The effects of delisting include the limited release of the market prices of
our common stock and limited news coverage of the Company. Delisting may
restrict investors' interest in our securities and materially adversely affect
the trading market and prices for such securities and our ability to issue
additional securities or to secure additional financing.
In addition to the risk of volatile stock prices and possible delisting, low
price stocks are subject to the additional risks of federal and state regulatory
requirements and the potential loss of effective trading markets. In particular,
if the common stock were delisted from trading on the Nasdaq SmallCap Market and
the trading price of the common stock was less than $5.00 per share, the common
stock could be subject to Rule 15g-9 under the Securities Exchange Act of 1934
which, among other things, requires that broker/dealers satisfy special sales
practice requirements. These requirements include making individualized written
suitability determinations and receiving purchasers' written consent, prior to
any transaction.
If our securities are deemed penny stocks under the Securities Enforcement
and Penny Stock Reform Act of 1990, this would require additional disclosure in
connection with trades in our securities. Such disclosure includes the delivery
of a disclosure schedule explaining the nature and risks of the penny stock
market.
The foregoing requirements could severely limit the liquidity of the
Company's securities and materially adversely affect our ability to issue
additional securities or to secure additional financing.
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CONTROL BY MANAGEMENT
The Company's officers and directors beneficially own approximately 28.3% of
the outstanding common stock. As a result of such ownership, management may have
the ability to control both the election of the directors and the outcome of
issues submitted to a vote of stockholders.
LIMITATIONS ON LIABILITY OF OFFICERS AND DIRECTORS
Our Certificate of Incorporation includes provisions to eliminate, to the
extent permitted by law, the personal liability of directors for monetary
damages arising from a breach of their fiduciary duties as directors. Our
Certificate of Incorporation also includes provisions to the effect that
(subject to certain exceptions) we shall indemnify, and upon request shall
advance expenses to, any director in connection with any action related to such
a breach of their fiduciary duties as directors to the extent permitted by law.
In addition, our Certificate of Incorporation requires that we indemnify any
director, officer, employee or agent of the Company for acts which such person
conducted in good faith.
As a result of such provisions, stockholders may be unable to recover
damages against the directors and officers for actions taken by them which
constitute negligence, gross negligence, or a violation of their fiduciary
duties. This may reduce the likelihood of stockholders instituting derivative
litigation against directors and officers. This may also discourage or deter
stockholders from suing directors, officers, employees, and agents of the
Company for breaches of their duty of care, even though such action, if
successful, might otherwise benefit the Company and stockholders.
SHARES ELIGIBLE FOR FUTURE SALE
Other than certain shares held by affiliates of the Company, substantially
all of our shares of common stock are freely transferable without restriction or
further registration under the Securities Act. The remaining shares are
"restricted securities" as that term is defined in Rule 144 under the Securities
Act. These restricted securities may be sold pursuant to Rule 144, other than
shares of common stock underlying certain options, warrants and convertible
securities which may be sold under Rule 144 pursuant to Rule 701 under the
Securities Act or if "cashless exercise" provisions are utilized in connection
with their exercise. The sale of a substantial number of shares of common stock
or the availability of common stock for sale could adversely affect the market
price of the common stock.
EFFECT OF PREVIOUSLY ISSUED OPTIONS, WARRANTS AND CONVERTIBLE DEBENTURES
As of March 31, 1998, options to purchase an aggregate of 30,100 shares of
common stock are outstanding under our 1995 stock option plan. These options are
exercisable at prices ranging from $0.10 to $4.90 per share, although
substantially all of such options are exercisable at $0.10 per share. In
addition, options to purchase an aggregate of 166,720 shares of common stock are
outstanding under our 1997 stock option plan. These options are exercisable at
prices ranging from $0.688 to $2.938 per share, although a majority of such
options are exercisable at $0.688 per share. We also have additional outstanding
options and warrants to purchase approximately 1,400,000 shares of common stock.
The foregoing is in addition to the shares which are issuable upon conversion of
the Company's $600,000 aggregate principal amount of convertible debentures.
Based on the market price of the common stock on July 26, 1999, approximately
721,665 shares would be issuable upon conversion of the convertible debentures,
which are currently convertible at a 25% discount to the market price of the
common stock. Additional shares are issuable for interest and liquidated damages
due on the debentures and as a result of the triggering of anti-dilution
provisions of other instruments and agreements.
The outstanding options, warrants and convertible debentures may hinder
future financings, since the holders of such securities may be expected to
exercise them at a time when we will otherwise be able to obtain equity capital
on more favorable terms. The existence or exercise of the outstanding options,
warrants and convertible debentures, and subsequent sale of the common stock
issuable upon such exercise could adversely affect the market price of the
Company's securities.
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OBLIGATIONS IN CONNECTION WITH THE ISSUANCE OF THE CONVERTIBLE DEBENTURES
We were obligated to register the underlying common stock issuable upon
conversion of our $600,000 aggregate principal amount of convertible debentures
under a registration rights agreement. We did not timely fulfill our
registration obligations in respect of the convertible debentures. We will be
required to pay liquidated damages in the form of increased interest on the
convertible debentures as a result of our failure to timely file such
registration statement and have it declared effective by the Securities and
Exchange Commission.
In addition, we have agreed to obtain (within 90 days following the issuance
of the convertible debentures) stockholder approval, in compliance with
applicable Nasdaq SmallCap requirements. The approval is for the possible
issuance upon conversion of the convertible debentures of shares of common stock
representing in excess of 19.99% of the outstanding shares of common stock on
the date the convertible debentures were issued. We will not timely obtain such
approval with respect to the convertible debentures. In addition, although we
believe that such approval will be obtained, we may be required to pay
liquidated damages in the form of increased interest on the convertible
debentures as a result of our failure to timely obtain stockholder approval.
RISKS APPLICABLE TO FOREIGN SALES
For the years ended December 31, 1996, 1997 and 1998, substantially all of
our interactive video revenues were derived from projects in foreign countries
from foreign sales. However, nearly all of the Company's current proposals are
for projects in North America.
It may be difficult to enforce agreements against foreign-based customers.
We may also face difficulties in collecting payments from foreign customers.
Other risks applicable to foreign sales include the difficulty and expense of
maintaining foreign sales distribution channels, barriers to trade, potential
fluctuations in foreign currency exchange rates, political and economic
instability, unavailability of suitable export financing, tariff regulations,
quotas, shipping delays, foreign taxes, export restrictions, licensing
requirements, changes in duty rates, and other United States and foreign
regulations. In addition, we may experience additional difficulties in providing
prompt and cost effective service for our products in foreign countries.
Finally, we believe that potential sales opportunities have been adversely
affected by the current Asian general economic downturn. We do not carry
insurance against any of these risks.
SUBSTANTIAL UP-FRONT EXPENSES; LIQUIDATED DAMAGES PROVISIONS AND OTHER
PROJECT RISKS
A significant portion of our revenues have been, and are expected to
continue to be, derived from substantial long-term projects which require
significant up-front expense to the Company. There can be no assurance that
revenues will be realized until the projects are completed or certain
significant milestones are met. For example, suppliers and developers for
long-term interactive video projects, such as the Korean, Israeli, Taiwanese,
and Chinese projects in which we participated, are required to reach certain
milestones prior to the Company's receipt of significant payments. Our failure,
or any failure by a third-party with which we may contract, to perform services
or deliver interactive video products on a timely basis could result in a
substantial loss to the Company.
Until recently, we have had difficulty in meeting delivery schedules, which
has resulted in customer dissatisfaction. In addition, difficulty in completing
a project could have a material adverse effect on our reputation, business, and
results of operations. In many instances, we are dependent on the efforts of
third parties to adequately complete their portion of a project and, even if our
digital video servers perform as required, a project may still fail due to other
components of the project supplied by third parties. As a result of liquidated
damages and "hold-back" provisions in customer contracts, we reserved
approximately $570,000, as of December 31, 1997 (none of which continues to be
reserved as of March 31, 1999), for potential uncollectible accounts receivable.
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CONSEQUENCES OF FIXED PRICE CONTRACTS AND COMMITMENTS
We have entered into and may in the future enter into fixed price agreements
for the sale of our products and services. Pricing for such commitments is made
based upon estimates of development and production effort and estimates of
future product costs. We bear the risk of faulty estimates, cost overruns and
inflation in connection with these commitments. Therefore, any fixed price
agreement can become unprofitable and could materially adversely affect the
Company.
We reserved approximately $673,000 for the year ended December 31, 1996 for
potential losses on uncompleted contracts. We completed our deliverables on the
contracts in the first quarter of 1998, exhausting the reserves established in
1996 and incurring additional costs of approximately $190,000. We cannot assure
you that these type of risks will not continue to negatively affect the
Company's margins and profitability.
COMPETITION
The interactive video industry is highly competitive. Many of the companies
with which we currently compete or may compete in the future have greater
financial, technical, marketing, sales and customer support resources, as well
as greater name recognition and better access to customers, than the Company. In
addition, certain of such competitors have entered into strategic alliances
which may provide them with certain competitive advantages. We can not assure
you that the Company will be able to compete successfully with existing or
future competitors.
UNCERTAIN MARKET ACCEPTANCE
We are engaged in the design and development of interactive video products.
As with any new technology, there is a substantial risk that the marketplace may
not accept the technology utilized in our products. Market acceptance of our
products will depend, in large part, upon our ability to demonstrate the
performance advantages and cost-effectiveness of our products over competing
products and the general acceptance of interactive video services. In
particular, we believe that widespread deployment of interactive video systems
will depend on a number of factors, including:
- decreases in the cost per subscriber;
- the "user-friendliness" of such systems, particularly set top boxes and
remote controls which are relatively easy to understand and use; and
- improvements in the quantity and quality of interactive services
available.
Although recent developments have reduced the cost per subscriber, and we
anticipate that such costs will continue to decrease as interactive video
systems are more widely deployed, the current cost per subscriber may make the
system too expensive for a number of potential network operators. We cannot
assure you that we will be able to market our technology successfully or that
any of our current or future products will be accepted in the marketplace.
RISKS ASSOCIATED WITH CONTRACTS WITH EN KAY TELECOM CO., LTD.
In September 1996, we entered into an agreement with En Kay Telecom Co.,
Ltd., a Korean company, pursuant to which we, as licensor, agreed to design a
digital set top box which would be manufactured and sold by En K in the Republic
of Korea. In February 1997, we entered into a second license agreement with En K
for the manufacture by En K of two models of our video servers in Korea, as well
as a license to sell those server models on an exclusive basis in Korea (subject
to an exception for another project) and on a non-exclusive basis elsewhere.
We received $600,000 under the 1996 agreement. However, in April 1997, we
stopped production under the 1996 agreement pending settlement of disputes under
the 1997 agreement. The 1997 agreement
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provided for the payment by En K to the Company of $1,000,000 on each of
February 21, 1997 and May 1, 1997, $4,000,000 during 1998, and minimum annual
purchases of $2,000,000 over a five-year period. En K has failed to make the
initial two payments under the 1997 agreement, although En K did pay $200,000 in
mid-May 1997.
We gave notice of default in April 1997, and placed En K in default in May
1997, when En K failed to cure the payment default within the agreed thirty-day
period. To date, En K has not honored either of its agreements with the Company.
We are continuing to consider various options in this matter, including
commencing legal proceedings. We cannot assure you that we would prevail in any
legal proceeding, or, if we do prevail, that we would collect any amounts
awarded. In addition, although we do not believe there is any basis for such a
course of action, it is possible that En K may seek to recover amounts
previously paid by us under the agreements.
NEED FOR STRATEGIC ALLIANCES
We believe that there are certain potential advantages to entering into one
or more strategic alliances with major interactive network or product providers.
Although we have entered into certain of such alliances, we are actively seeking
to enter into more of such alliances. Certain of our competitors and potential
strategic allies may have entered into or may enter into agreements which may
preclude such potential allies from entering into alliances with us. We cannot
assure you that we will be successful in entering into any such strategic
alliances on acceptable terms or, if any such strategic alliance is entered
into, that we will realize the anticipated benefits from such strategic
alliance.
DEPENDENCE ON SUPPLIERS; MANUFACTURING RISKS
We rely primarily on outside suppliers and subcontractors for substantially
all of our parts, components and manufacturing supplies. Certain materials are
currently available only from one supplier or a limited number of suppliers. We
do not maintain long-term supply contracts with our suppliers. The disruption or
termination of our supply or subcontractor arrangements could have a material
adverse effect on the Company's business and results of operations. Our reliance
on third parties involves significant risks, including reduced control over
delivery schedules, quality assurance, manufacturing yields and cost, the
potential lack of adequate capacity, and potential misappropriations of the
Company's intellectual property. In addition, vendor delays or quality problems
could also result in lengthy production delays.
To obtain manufacturing resources, we may contract for manufacturing by
third parties or may seek to enter into joint venture, sublicense, or other
arrangements with another party which has established manufacturing capability.
Alternatively, we may choose to pursue the commercialization of such products on
our own. We cannot assure you that, either on our own or through arrangements
with others, we will be able to obtain such arrangements on acceptable terms.
RELIANCE ON KEY CUSTOMERS
Our interactive video services revenues to date had been derived almost
exclusively from five telecommunications customers, none of whom have placed a
new order with the Company since June 1997. The lack of new projects and major
customers has had, and may continue to have, a material adverse effect on the
Company.
LACK OF PATENT AND COPYRIGHT PROTECTION
Although we have filed a provisional patent application with respect to
certain technology, we hold no patents and have not generally filed patent
applications. Our methods of protecting our proprietary knowledge may not afford
adequate protection. We cannot assure you that any patents applied for will be
issued, or, if issued, that such patents would provide us with meaningful
protection from competition.
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In Asia and third world countries, in which we do business and have had
license agreements, the unauthorized use of technology, whether protected
legally or not, is widespread. It is possible that our technology will be
subject to theft and infringement. Furthermore, in accordance with our current
business plan, it will be necessary for us to make our intellectual property
available to vendors, customers, and other companies in the industry, making it
even more difficult to protect our technology.
RISK OF THIRD PARTY CLAIMS OF INFRINGEMENT
Technology-based industries, such as ours, are characterized by an
increasing number of patents and frequent litigation based on allegations of
patent infringement. From time to time, third parties may assert patent,
copyright and other intellectual property rights to technologies that are
important to the Company. While there currently are no outstanding infringement
claims pending by or against us, we cannot assure you that third parties will
not assert infringement claims against us in the future, that assertions by such
parties will not result in costly litigation, or that we would prevail in any
such litigation. In addition, we cannot assure you that we would be able to
license any valid and infringed patents from third parties on commercially
reasonable terms or, alternatively, be able to redesign products on a
cost-effective basis to avoid infringement. Any infringement claim or other
litigation against or by us could have a material adverse effect on the Company.
NO ASSURANCE OF TECHNOLOGICAL SUCCESS
Our ability to commercialize our products is dependent on the advancement of
our existing technology. In order to obtain and maintain a significant market
share we will continually be required to make advances in technology. We cannot
assure you that our research and development efforts will result in the
development of such technology on a timely basis or at all. Any failures in such
research and development efforts could result in significant delays in product
development and have a material adverse effect on the Company. We cannot assure
you that we will not encounter unanticipated technological obstacles which
either delay or prevent us from completing the development of our products.
We believe there are certain technological obstacles to be overcome in order
to develop future products. These obstacles include the lack of an electronic
data interchange server interface (used for real-time exchange of data between
servers) and enhancements in the ability to access and utilize information
stored on remote servers. In certain cases, we will be dependent upon
technological advances which must be made by third parties. We cannot assure you
that we or such third parties will not encounter technological obstacles which
either delay or prevent us from completing the development of our future
products. Such obstacles could have a material adverse effect on the Company.
PRODUCT OBSOLESCENCE; TECHNOLOGICAL CHANGE
The industries in which we operate are characterized by unpredictable and
rapid technological changes and evolving industry standards. We will be
substantially dependent on our ability to identify emerging markets and develop
products that satisfy such markets. We cannot assure you that we will be able to
accurately identify emerging markets or that any products we have or will
develop will not be rendered obsolete as a result of technological developments.
We believe that competition in our business may intensify as technological
advances in the field are made and become more widely known. Many companies with
substantially greater resources than the Company are engaged in the development
of products similar to those proposed to be sold by us. Commercial availability
of such products could render our products obsolete, which would have a material
adverse effect on the Company.
From time to time, the Company may announce new products or technologies
that have the potential to replace our existing products offerings. We cannot
assure you that the announcement or expectation of
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new product offerings by us or others will not cause customers to defer
purchases of existing Company products, which could materially adversely affect
the Company.
EFFECT OF INDUSTRY STANDARDS AND COMPATIBILITY WITH EQUIPMENT AND SOFTWARE
The interactive video industry is currently characterized by emerging
technological standards. Widespread commercial deployment of our products will
depend on determinations by the industry as to whether such products will be
compatible with the infrastructure equipment and software which comprise those
standards. Failure to comply substantially with industry standards in a timely
manner, either as they exist at a given time or as they may evolve in the
future, could have a material adverse effect on the Company. In some cases, to
be compatible with industry standards, we may need to obtain the cooperation of
its suppliers, partners, and competitors, which we cannot assure.
ERRORS AND OMISSIONS; SOFTWARE AND HARDWARE BUGS
Certain of our products consist of internally developed software and
hardware component sets, purchased software from third parties and purchased
hardware components. Additionally, we outsource substantially all of the
manufacturing of our products, including the installation and configuration of
certain hardware and software components. There is a substantial risk that these
components will have or could develop certain errors, omissions or bugs that may
render our products unfit for the purposes for which they were intended. While
there are no such known errors, omissions or bugs, we cannot assure you that
such errors, omissions or bugs do not currently exist or will not develop in our
current or future products. Any such error, omission or bug found in our
products could lead to delays in shipments, recalls of previously shipped
products, damage to the Company's reputation, and other related problems which
would have a material adverse effect on the Company.
GOVERNMENT REGULATION
The Federal Communications Commission and certain state agencies regulate
certain of our products and services and certain of the users of such products
and services. We are also subject to regulations applicable to businesses
generally, including regulations relating to manufacturing. In addition,
regulatory authorities in foreign countries in which we sell or may sell our
products may impose similar or more extensive governmental regulations.
We have relied upon, and contemplate that we will continue to rely upon, our
corporate partners or interactive video system sponsors to comply with
applicable regulatory requirements. We cannot assure you that such regulations
will not materially adversely affect the Company by jeopardizing the projects in
which we are participating, by imposing burdensome regulations on the users of
the products, by imposing sanctions that directly affect us, or otherwise.
Changes in the regulatory environment relating to the industries in which we
compete could have an adverse effect on the Company. We cannot predict the
effect that future regulation or regulatory changes may have on our business.
PRODUCT LIABILITY AND AVAILABILITY OF INSURANCE
The manufacture and sale of our products entail the risk of product
liability claims. In addition, many of the telephone, cable, and other large
companies with which we do or may do business may require financial assurances
of product reliability. We maintain product liability insurance in the amount of
$1,000,000 per occurrence and $2,000,000 in the aggregate. We may be required to
obtain additional insurance coverage. Product liability insurance is expensive
and we cannot assure you that additional insurance will be available on
acceptable terms, if at all, or that it will provide adequate coverage against
potential liabilities. The inability to obtain additional insurance at an
acceptable cost or to otherwise protect against potential product liability
could prevent or inhibit commercialization of our products. A
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successful claim brought against us in excess of our insurance coverage could
have a material adverse effect on the Company.
VARIABILITY OF QUARTERLY OPERATING RESULTS
Variations in our revenues and operating results occur from time to time as
a result of a number of factors, such as the number of interactive video
projects in which we are engaged, the completion of work or achievement of
milestones on long-term projects, and the timing and progress of our product
development efforts. The timing and realization of revenues is difficult to
forecast, in part, because our sales and product development cycles for
interactive video products can be relatively long and may depend on factors such
as the size and scope of our projects.
We have not received material new orders, other than an order in September
1998 for $96,000 and an order in January 1999 for $1,253,000 ($13,000 of which
has been recognized through the second quarter of 1999) for interactive video
projects since June 1997, although we received a number of orders for CD-ROM
products in the fourth quarter of 1998. Furthermore, as a result of a variety of
other factors, including the introduction of new products and services by
competitors, and pricing pressures and economic conditions in various geographic
areas where our customers and potential customers do business, our sales and
operating results may vary substantially from year to year and from quarter to
quarter.
The variation in sales and operating results may be expected to increase as
a result of the scaling back of our CD-ROM operations. In addition, the timing
of revenue recognition for revenue received from long term projects under our
accounting policies may also contribute to significant variations in our
operating results from quarter to quarter.
ANTI-TAKEOVER EFFECTS ASSOCIATED WITH THE ISSUANCE OF "BLANK CHECK"
PREFERRED STOCK AND DELAWARE LAW
Our Certificate of Incorporation authorizes our Board of Directors to issue
up to 3,000,000 shares of "blank check" preferred stock. The Board of Directors,
without stockholder approval, may fix all the rights of the preferred stock. The
issuance of such stock could, among other results, negatively affect the voting
power of the holders of common stock.
Under certain circumstances, the issuance of the preferred stock would make
it more difficult for a third party to gain control of the Company, discourage
bids for the common stock at a premium, or otherwise adversely affect the market
price of the common stock. Such provisions may discourage attempts to acquire
the Company. In addition, certain provisions of Delaware law may also discourage
third party attempts to acquire control of the Company.
We have no current arrangement, commitment or understanding with respect to
the issuance of our preferred stock. We cannot assure you, however, that we will
not, in the future, issue shares of preferred stock.
NON-CASH CHARGES
As a result of our issuance of convertible debentures in the first quarter
of fiscal 1999, we were required to reflect the difference between the aggregate
conversion price of all of the convertible debentures and the current fair
market value (on the date of issuance of the convertible debentures) of the
shares underlying the convertible debentures as a discount on the convertible
debentures and as additional paid in capital. Based on the market price on the
convertible debenture issuance dates, the discount and paid in capital was
approximately $230,000. Such amount is being amortized as a non-cash interest
expense over a 90-day period (the period between the date of issuance of the
convertible debentures and the date the convertible debentures first become
exercisable).
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As a result of our issuance of certain warrants in July 1997, as well as the
repayment of notes issued in July 1997, we had an aggregate amount of non-cash
interest expense and loss on extinguishment of debt of approximately $1,440,000.
We also incurred a charge of approximately $306,834 related to the write-off of
financing costs previously capitalized in connection with our private placements
in 1996 and 1997. In addition, we incurred significant non-cash compensation
expenses in 1997 related to the difference between the exercise price of certain
options granted and the deemed fair value of the common stock underlying such
options amounting to approximately $2,544,755.
GENERAL ECONOMIC CONDITIONS
The industry in which we compete relies in part upon consumer confidence and
the availability of discretionary income. Both of these can be adversely
affected during a general economic downturn. In addition, potential customers
may not be willing or able to commit funds to interactive video projects during
such a downturn.
POSSIBLE VOLATILITY OF STOCK PRICE
The market prices of equity securities of computer technology and software
companies have experienced extreme price volatility in recent years for reasons
not necessarily related to the individual performance of specific companies.
Accordingly, the market price of the common stock may be highly volatile. The
market price of the common stock may be significantly affected or may fluctuate
substantially due to factors such as the following:
- announcements by the Company or its competitors concerning products,
patents, technology and governmental regulatory actions;
- other events affecting computer technology and software companies
generally; and
- general market and economic conditions.
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THE COMPANY
The Company was incorporated in Tennessee in 1993 and was reincorporated in
Delaware in August 1997. The Company designs, develops, integrates, installs,
operates, and supports interactive video services hardware and software. In the
interactive video services area, the Company seeks to provide solutions,
including products and services developed by the Company and by strategic
partners, that enable interactive video programming and applications to be
provided to a wide variety of market niches. The Company has installed 15
digital video servers in five countries (China, Korea, Israel, Taiwan and
Canada), on each of the major types of networks accommodating interactive video
services. The Company believes that it has demonstrated the ability to deploy
and operate interactive video systems over each of the major network types.
RECENT DEVELOPMENTS
At March 31, 1999, the Company had cash on hand of approximately $55,000 and
a negative working capital of approximately $647,000. Since December 31, 1998,
the Company has used funds from private financings and operations for working
capital purposes to pay certain outstanding obligations. The Company's cash
position continues to be uncertain and its working capital has declined since
year-end. The Company will not be able to continue as a going concern unless it
receives substantial funds from financings, operations or other sources. The
Company is continuing to seek to arrange financing, including possible strategic
investment or opportunities to sell some or all of the Company's assets and
business. The Company also continues to seek buyers for all (or portions) of its
CD-ROM division, either the Mediator or WorkWare segments, or both. The Company
is taking additional steps to collect accounts receivable. There can be no
assurance that the Company will be able to obtain any such required additional
funds on a timely basis, on favorable terms, or at all.
The Company entered into a written lease agreement with Centerpoint Plaza,
L.P., dated November 25, 1997, which was amended on April 1, 1998. The lease was
terminated by the landlord as a result of the Company's breach, effective
January 29, 1999. The Company is currently occupying a portion of its former
premises on a month-to-month basis at a reduced rental. Pursuant to an agreement
between the Company and the landlord, the Company acknowledged breach of the
lease due to its failure to pay the required rental amount, and the landlord
agreed to forego its right to immediate possession of the premises until
February 20, 1999 if the Company performed certain acts. The agreement provided
that any time after February 20, 1999, the landlord could cause its counsel to
(a) file a detainer warrant or complaint and (b) submit the answers and agreed
judgments executed by the Company if the parties did not enter into a written
agreement regarding the portion of the previously leased premises currently
occupied by the Company. The Company and the landlord are still in negotiations
to finalize the new rental terms. No assurance can be given as to the successful
conclusion of these negotiations.
The Company has reduced its workforce to approximately 12 employees, due, in
large measure, to its inability to realize sufficient cash flow from operations.
The Company is in arrears in paying compensation to such employees. The Company
will not be able to continue to retain such employees if it does not obtain
additional funds to compensate them.
The Company and FutureTrak International, Inc., a Florida corporation,
signed a letter of intent dated as of April 26, 1999, regarding a merger of
FutureTrak International into the Company or a subsidiary of the Company.
FutureTrak International is engaged in delivering Integrated Entertainment/
Information Products and Services such as DIRECTV, real time stock quote,
weather information, high speed Internet and other content to multi housing
units. The Company and FutureTrak also entered into a two year investment
banking agreement with Sands Brothers Co., Ltd of New York on June 28, 1999
whereby Sands Brothers will advise the Company on merger and acquisition
strategies, capital raising activities and corporate development opportunities.
Although the Company intends to consummate the
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merger, no assurance can be given the parties will reach a definitive agreement
concerning such merger or that the merger will be consummated.
SELLING STOCKHOLDERS
The following table sets forth information concerning shares beneficially
owned by the Selling Stockholders as of July 26, 1999.
RNI Limited Partnership, First Empire Corporation, Gregg A. Tucker and
Michael Kesselbrenner are offering shares of common stock issuable upon
conversion of Convertible Debentures. Each of the holders of the Convertible
Debentures has also entered into a subscription agreement and a registration
rights agreement with the Company. See "Plan of Distribution" on page 17.
The Company hired May Davis Group, Inc. as consultant to the Company for
financial and investment banking advice and services pursuant to an agreement
dated October 15, 1998. Warrants to purchase 100,000 shares of common stock were
issued to Aries International, Inc., Kenneth Merkel, Hunter Scott Singer, Mark
Anthony Angelo, Joseph W. Donohue and Cornelius Max Rockwell in consideration
for May Davis' services under that agreement. May Davis acted as placement agent
in connection with the offering of the Convertible Debentures and received a
placement fee of 10% and non-accountable expenses of 2% of the gross proceeds of
the offering of the Convertible Debentures. May Davis is continuing to perform
services for the Company and may participate in future financings of the
Company. Aries International, Inc. is a consultant to RNI Limited Partnership;
Kenneth Merkel is a registered representative of May Davis; Hunter Scott Singer
is a Senior Vice President of May Davis; Mark Anthony Angelo is a Vice President
of May Davis; Joseph W. Donohue is a Senior Vice President of May Davis; and
Cornelius Max Rockwell is a Senior Vice President of May Davis.
The Company, together with FutureTrak International, hired Continental
Capital and Equity Corporation as a consultant to the Company for investment
public relations services pursuant to an agreement dated June 24, 1999. The
Company issued 100,000 shares of common stock to Continental Capital under that
agreement.
Squadron, Ellenoff, Plesent & Sheinfeld, LLP serves as counsel to the
Company. The Company has granted Squadron, Ellenoff a security interest in its
personal property to secure payment of amounts due that firm. The Company has
issued 213,129 shares of common stock to Squadron, Ellenoff for nominal
consideration. To the extent that any accounts receivable are due it from the
Company at any time when any such shares are sold by Squadron, Ellenoff, such
accounts receivable shall be reduced by an amount equal to the net proceeds of
such sale.
The Company has retained Ronald Phillips for travel services. In exchange
for those services, the Company issued Mr. Phillips 10,000 shares of common
stock.
The Company has issued a total of 140,247 shares of common stock in
consideration for the cancellation of receivables due from various vendors. In
exchange for the cancellation of such debt, Media South LLC received 423 shares
of common stock; Daniel Parker received 103,523 shares of common stock; Terrapin
Associates and Warren Cummings received 2,560 shares of common stock; Alan Caron
received 4,000 shares of common stock; and Antonio Daza received 29,741 shares
of common stock.
Other than the relationship described above and the ownership of the
Company's securities by the selling stockholders, none of the selling
stockholders has had any material relationship with the Company within the past
three years. The table has been prepared based on information furnished to the
Company by or on behalf of the selling stockholders.
Any or all of the shares listed below may be offered for sale by the selling
stockholders from time to time and, therefore, no estimate can be given as to
the number of shares that will be held by the selling
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stockholders upon termination of this offering. Except as otherwise indicated,
the selling stockholders listed in the table have sole voting and investment
powers with respect to the shares indicated.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP
-------------------------
<S> <C> <C> <C>
PRIOR TO
STOCKHOLDER OFFERED SALE AFTER SALE
- ------------------------------------------------------------------------- ----------- ------------ -----------
RNI Limited Partnership.................................................. 368,333(1) 260,025(2) 0
First Empire Corporation................................................. 120,833(1) 120,833(3) 0
Greg A. Tucker........................................................... 117,777(1) 117,777(3) 0
Michael Kesselbrenner.................................................... 114,722(1) 126,722(3) 12,000(4)
Aries International, Inc................................................. 22,500(5) 22,500(5) 0
May Davis Group, Inc..................................................... 10,000(5) 10,000(5) 0
Kenneth Merkel........................................................... 2,500(5) 2,500(5) 0
Hunter Scott Singer...................................................... 16,250(5) 16,250(5) 0
Mark Anthony Angelo...................................................... 16,250(5) 16,250(5) 0
Joseph W. Donohue........................................................ 16,250(5) 16,250(5) 0
Cornelius Max Rockwell................................................... 16,250(5) 16,250(5) 0
Continental Capital and Equity Corporation............................... 100,000 100,000 0
Squadron, Ellenoff, Plesent & Sheinfeld, LLP............................. 213,129 213,129 0
Ronald Phillips.......................................................... 10,000 10,000 0
Media South LLC.......................................................... 423 423 0
Daniel Parker............................................................ 103,523 113,523 10,000(4)
Terrapin Associates and Warren Cummings.................................. 2,560 2,560 0
Alan Caron............................................................... 4,000 11,415 7,415(4)
Antonio Daza............................................................. 29,741 31,241 1,500(4)
</TABLE>
- ------------------------
(1) Consists of shares of the Company's common stock issuable upon conversion of
the outstanding principal amount of, and interest and other amounts due
under, the Convertible Debentures. The Company may not issue to the holders
of the Convertible Debentures shares of common stock issuable upon the
conversion of the Convertible Debentures representing in the aggregate more
than 19.99% of the number of shares of common stock outstanding on the date
the Convertible Debentures were purchased by the holders (or an aggregate of
860,944 shares) unless the stockholders of the Company approve the issuance
of a greater number of shares of common stock. Such approval has not been
obtained. See "Risk Factors--Obligations in Connection with the Issuance of
the Convertible Debentures" on page 7.
(2) Represents 4.99% of the outstanding common stock of the Company as of July
26, 1999. Each of the holders of the Convertible Debentures is prohibited
from beneficially owning more than 4.99% of the outstanding shares of common
stock of the Company at any one time.
(3) 353,332 shares of the Company's common stock are issuable as of July 26,
1999 upon conversion of the Convertible Debentures held by such selling
stockholders in the aggregate (120,833 shares issuable to First Empire
Corporation, 117,777 shares issuable to Greg A. Tucker, and 114,722 shares
issuable to Michael Kesselbrenner), including shares issuable as liquidated
damages in respect of the Convertible Debentures. See "Risk
Factors--Obligations in Connection with the Issuance of the Convertible
Debentures" on page 7.
(4) Assuming all of the shares of common stock offered for sale on behalf of the
Selling Stockholders are sold.
(5) These shares of the Company's common stock are or may be issuable upon
exercise of outstanding warrants.
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USE OF PROCEEDS
The Company will not receive any proceeds from any sale of the shares
offered hereby or upon conversion of the Convertible Debentures. The Company
will receive $1.00 per share upon exercise of the warrants.
PLAN OF DISTRIBUTION
The shares offered hereby may be offered and sold from time to time by the
selling stockholders, or by pledgees, donees, transferees or other successors in
interest. Such offers and sales may be made from time to time on the Nasdaq
SmallCap Market or otherwise, at prices and on terms then prevailing or at
prices related to the then-current market price, or in negotiated transactions.
The methods by which the shares may be sold may include, but not be limited to,
the following: a block trade in which the broker or dealer so engaged will
attempt to sell the shares as agent but may position and resell a portion of the
block as principal to facilitate the transaction; purchases by a broker or
dealer as principal and resale by such broker or dealer for its account; an
exchange distribution in accordance with the rules of such exchange; ordinary
brokerage transactions and transactions in which the broker solicits purchasers;
privately negotiated transactions; short sales; and a combination of any such
methods of sale. In effecting sales, brokers or dealers engaged by the selling
stockholders may receive commissions or discounts from the selling stockholders
or from the purchasers in amounts to be negotiated immediately prior to the
sale. The selling stockholders may also sell such shares in accordance with Rule
144 under the Securities Act.
In order to comply with certain state securities laws, if applicable, the
shares will be sold in such jurisdictions only through registered or licensed
brokers or dealers. In certain states, the shares may not be sold unless such
shares have been registered or qualified for sale in such state or an exemption
from registration or qualification is available and is complied with.
Under applicable rules and regulations under the Exchange Act, any person
engaged in a distribution of the shares may not simultaneously engage in
market-making activities with respect to such shares for a period of one or five
business days prior to the commencement of such distribution. In addition to,
and without limiting, the foregoing, each of the selling stockholders and any
other person participating in a distribution will be subject to the applicable
provisions of the Exchange Act and the rules and regulations thereunder,
including, without limitation, Regulation M, which provisions may limit the
timing of purchases and sales of any of the shares by the selling stockholders
or any such other person. All of the foregoing may affect the marketability of
the shares.
The Company has entered into a registration rights agreement with the
holders of the Convertible Debentures. Under such agreement, the Company has
agreed to use its best efforts to maintain the effectiveness of the registration
of the shares offered hereby until the earliest of the date two years after the
closing date of receipt of funds for the convertible debentures, the date upon
which all of the shares offered hereby are no longer owned by the holders or the
date when the holder may sell the shares offered hereby under Rule 144. The
Company has also agreed to bear all reasonable expenses relating to the
registration of the shares, including the fees and expenses of one counsel to
the holders of the Convertible Debentures. Any underwriting or broker's
discounts, commissions and fees and transfer taxes incurred in connection with
the registration of the shares will be borne by the selling stockholders.
The registration rights agreement also provides that the Company will
indemnify and hold harmless the holders of the Convertible Debentures, any
directors or officers of such holders or any person who controls such holders
against any losses, claims, damages, liabilities or expenses (joint or several)
that arise out of or are based upon certain statements, omissions or violations
of this registration statement, unless any of the foregoing arise out of
information furnished in writing to the Company by such persons. In such case,
such persons shall indemnify the Company, its officers, directors and agents
(including counsel)
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against any claims arising out of or based upon such furnished information. To
the extent any indemnification is prohibited or limited by law, the indemnifying
party has agreed to make the maximum contribution with respect to any amounts
for which it would otherwise be liable, subject to certain exceptions.
Pursuant to the Convertible Debentures, the holders of such Convertible
Debentures are prohibited from beneficially owning more than 4.99% of the
outstanding shares of common stock of the Company. In addition, the Company is
not required to issue more than 19.99% of the number of shares of Common Stock
outstanding on the date the Convertible Debentures were purchased by the
holders, unless the shareholders of the Company approve the issuance of
additional common stock (or Nasdaq waives the requirement). The Company has
agreed to use commercially reasonable efforts to obtain such approval or waiver.
The selling stockholders and any brokers participating in such sales may be
deemed to be underwriters within the meaning of the Securities Act. There can be
no assurances that the selling stockholders will sell any or all of the shares
offered hereby.
Any commissions paid or any discounts or concessions allowed to any broker,
dealer, underwriter, agent or market maker and, if any such broker, dealer,
underwriter, agent or market maker purchases any of the shares as principal, any
profits received on the resale of such shares, may be deemed to be underwriting
commissions or discounts under the Securities Act.
LEGAL MATTERS
The validity of the shares under applicable state law has been passed upon
for the Company by Squadron, Ellenoff, Plesent & Sheinfeld, LLP, New York, New
York 10176. The Company has granted Squadron, Ellenoff a security interest in
its personal property to secure payment of amounts due to that firm. In addition
Squadron, Ellenoff beneficially owns 213,129 shares of the Company's common
stock, which are being offered under the Prospectus.
EXPERTS
The financial statements incorporated in this Prospectus by reference to the
Annual Report on Form 10-KSB for the year ended December 31, 1998, have been so
incorporated in reliance on the report (which contains an explanatory paragraph
relating to the Company's ability to continue as a going concern as described in
Note 3 to the financial statements) of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. You may read and copy any materials we file with the
SEC at the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington,
D.C. 20549, or at the SEC's regional offices in New York City and Chicago. You
may obtain information on the operation of the Public Reference Room by calling
the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site that contains
reports, proxy and information statements, and other information regarding
issuers that file electronically (http://www.sec.gov). You also may inspect
reports and other information concerning us at the offices of the National
Association of Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C.
20006.
The SEC allows us to "incorporate by reference" the information we file with
them, which means that we can disclose important information to you by referring
you to those documents. We incorporate by reference and make a part of this
prospectus the following:
(1) the Company's Quarterly Report on Form 10-QSB for the period ended
March 31, 1999;
(2) a Form 12b-25 file May 17, 1999;
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(3) the Company's Current Report on Form 8-K, having a report date of
April 21, 1999;
(4) Amendment No. 1 to the Company's Annual Report on Form 10-KSB for
the fiscal year ended December 31, 1998;
(5) the Company's Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1998;
(6) the description of the Company's common stock contained in its
Registration Statement on Form 8-A (file no. 0-23279) filed with the
Commission on October 28, 1997.
Each document filed by the Company with the SEC pursuant to Section 13(a),
13(c), 14, or 15(d) of the Exchange Act after the date of this prospectus and
before the end of the offering made hereby is also incorporated by reference
into this prospectus from the filing date of filing of such document.
If any statement in any document incorporated by reference is inconsistent
with this prospectus, the statement in the latest document supersedes the
earlier statement. You should not rely on any statement that has been
superseded.
The Company will provide upon request a free copy of the documents that are
incorporated by reference in the prospectus. Requests for such information
should be directed to: Celerity Systems, Inc., 1400 Centerpoint Boulevard,
Knoxville, Tennessee 37932; Attention: Kenneth D. Van Meter. The Company's
telephone number is (423) 539-5300.
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
Certain statements included or incorporated by reference into this
prospectus constitute "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995, and include statements made in
press releases and oral statements made by our officers, directors or employees
acting on our behalf. All such forward-looking statements involve known and
unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of the Company, or industry results, to be
materially different from any future results, performance, or achievements
expressed or implied by such forward-looking statements. Such factors include,
among others, market demand for the Company's products, successful
implementation of the Company's products, competitive factors, the ability to
manage the Company's growth, the ability to recruit additional personnel and
other factors referenced in this prospectus and in the company's filings with
the Securities and Exchange Commission. In addition to statements which
explicitly describe such risks and uncertainties, you are urged to consider
statements labeled with the terms "believes," "belief," "expects," "plans,"
"anticipates" or "intends," to be uncertain and forward-looking.
19
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESMAN, OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING MADE HEREBY, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, ANY OF THE SECURITIES OFFERED HEREBY IN ANY
JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR
SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE
HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATES AS OF WHICH SUCH INFORMATION IS FURNISHED.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Summary of Offering............................. 2
Risk Factors.................................... 3
The Company..................................... 14
Selling Stockholders............................ 15
Use of Proceeds................................. 16
Plan of Distribution............................ 17
Legal Matters................................... 18
Experts......................................... 18
Where You Can Find More Information............. 18
Special Note Regarding Forward Looking
Statements.................................... 19
</TABLE>
CELERITY SYSTEMS, INC.
1,285,041 SHARES OF
COMMON STOCK
---------------------
PROSPECTUS
---------------------
AUGUST , 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following is an itemization of all expenses (subject to future
contingencies) incurred or expected to be incurred by the Company in connection
with the issuance and distribution of the securities being offered hereby (items
marked with an asterisk (*) represent estimated expenses):
<TABLE>
<S> <C>
SEC Registration Fee.............................................. $ 358
Legal Fees and Expenses........................................... $ 11,000*
Accounting Fees and Expenses...................................... $ 4,000*
Miscellaneous..................................................... $ 0*
---------
Total....................................................... $ 15,358*
---------
---------
</TABLE>
- ------------------------
* Estimate
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Delaware General Corporation Law, Section 102(b)(7), subject to certain
exceptions, enables a corporation in its certificate of incorporation to
eliminate or limit personal liability of members of its Board of Directors for
violations of a director's fiduciary duty of care.
The Company's Certificate of Incorporation includes the following language:
"No director of the Corporation shall be liable to the Corporation or
any of its stockholders for monetary damages for breach of fiduciary duty as
a director, provided that this provision does not eliminate or limit the
liability of the director (i) for any breach of the director's duty of
loyalty to the Corporation or its stockholder, (ii) for acts or omissions
not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of title 8 of the Delaware Code,
or (iv) for any transaction from which the director derived an improper
personal benefit."
In addition, Delaware General Corporation Law, Section 145, permits a
corporation organized under Delaware law to indemnify directors and officers
with respect to any matter in which a director or officer acted in good faith
and in a manner reasonably believed to be not opposed to the best interests of
the Company, and, with respect to any criminal action, had reasonable cause to
believe the conduct was lawful.
The Company's Certificate of Incorporation includes the following language:
"Each person who was or is made a party or is threatened to be made a
party to or is otherwise involved in any action, suit, or proceeding,
whether civil, criminal, administrative, or investigative (hereinafter a
"proceeding"), by reason of the fact that he or she is or was a director,
officer, employee, or agent of the Corporation or any of its director or
indirect subsidiaries or is or was serving at the request of the Corporation
as a director, officer, employee, or agent of any other corporation or of a
partnership, joint venture, trust or other enterprise, including service
with respect to an employee benefit plan (hereinafter an "indemnitee"),
whether the basis of such proceeding is alleged action in an official
capacity as a director, officer, employee, or agent in any other capacity
while serving as a director, officer, employee, or agent in any other
capacity while serving as a director, officer, employee, or agent, shall be
indemnified and held harmless by the Corporation to the fullest extent
authorized by the Delaware Code, as the same exists or may hereafter be
amended (but, in the case of any such amendment, only to the extent that
such amendment permits the Corporation to provided broader indemnification
rights than permitted prior thereto), against all expense, liability, and
loss (including attorneys' fees, judgments, fines, excise, or other taxes
assessed with respect to an employee benefit plan, penalties, and amounts
paid in settlement) reasonably incurred or suffered by
II-1
<PAGE>
such indemnitee in connection therewith, and such indemnification shall
continue as to an indemnitee who has ceased to be a director, officer,
employee, or agent and shall inure to the benefit of the indemnitee's heirs,
executors, and administrators; provided, however, that, except as provided
in Paragraph C of this Article Ninth with respect to proceedings to enforce
rights to indemnification, the Corporation shall indemnify any such
indemnitee only if such proceeding (or part thereof) was authorized by the
Board of Directors of the Corporation."
The Company has a liability insurance policy in effect for officers and
directors. Such insurance, in certain instances, insures the directors and
officers of the Company against liabilities arising under the Securities Act,
including liabilities arising out of the offering made by this Registration
Statement.
ITEM 16. EXHIBITS
(a) The following exhibits are filed herewith:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------- -----------------------------------------------------------------------------------------------------
<C> <S>
4.1 Form of Convertible Debenture(1)
4.2 Form of Warrant issued April 27, 1999(2)
4.3 Form of Registration Rights Agreement, between the Company and each of RNI Limited Partnership, First
Empire Corporation, Greg A. Tucker and Michael Kesselbrenner(1)
4.4 Form of Subscription Agreement, between the Company and each of RNI Limited Partnership, First Empire
Corporation, Greg A. Tucker and Michael Kesselbrenner(1)
5 Opinion of Squadron, Ellenoff, Plesent & Sheinfeld, LLP(3)
23.1 Consent of PricewaterhouseCoopers LLP(2)
23.2 Consent of Squadron, Ellenoff, Plesent & Sheinfeld, LLP (contained in the Opinion filed as Exhibit 5)
24 Power of Attorney (included on the signature pages hereto)
27 Financial Data Schedule(1)( )
</TABLE>
- ------------------------
(1) Incorporated by reference to Amendment No. 1 to the Company's Annual Report
on Form 10-KSB for the fiscal year ended December 31, 1998.
(2) Previously filed.
(3) Filed herewith.
ITEM 17. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in
the registration statement. Notwithstanding the foregoing, any increase
or decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering
range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if,
II-2
<PAGE>
in the aggregate, the changes in volume and price represent no more than
a 20% change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration
statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;
provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply
if the Registration Statement is on Form S-3, and the information
required to be included in a post-effective amendment by those paragraphs
is contained in periodic reports filed by the registrant pursuant to
Section 13 or Section 15(d) of the Securities Exchange Act of 1934, that
are incorporated by reference in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
(3) to remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) That, for purposes of determining any liability under the Securities Act
of 1933, each filing of the Registrant's annual report pursuant to section 13(a)
or section 15(d) of the Securities Exchange Act of 1934 that is incorporated by
reference in the registration statement shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
II-3
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing this Registration Statement on Form S-3
("Registration Statement") and authorized this Registration Statement to be
signed on its behalf by the undersigned, in the City of Knoxville, State of
Tennessee, July 30, 1999.
CELERITY SYSTEMS, INC.
By: /s/ KENNETH D. VAN METER
-----------------------------------------
Kenneth D. Van Meter
PRESIDENT, CHIEF EXECUTIVE OFFICER AND
CHAIRMAN OF THE BOARD
In accordance with to the requirements of the Securities Act, this
Registration Statement has been signed by the following persons in the
capacities and on the dates stated.
NAME TITLE DATE
- ------------------------------ --------------------------- -------------------
President, Chief Executive
Officer and Chairman of
/s/ KENNETH D. VAN METER * the Board (Principal
- ------------------------------ Executive Office July 30, 1999
Kenneth D. Van Meter (Principal Financial
Officer)
/s/ KENNETH D. VAN METER * Director
- ------------------------------ July 30, 1999
Fenton Scruggs
/s/ KENNETH D. VAN METER * Director
- ------------------------------ July 30, 1999
Donald Greenhouse
/s/ KENNETH D. VAN METER * Director
- ------------------------------ July 30, 1999
Stephen Portch
/s/ KENNETH D. VAN METER * Director
- ------------------------------ July 30, 1999
Mark Braunstein
*Attorney-in-fact and agent
II-4
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------- -----------------------------------------------------------------------------------------------------
<C> <S>
4.1 Form of Convertible Debenture(1)
4.2 Form of Warrant issued April 27, 1999(2)
4.3 Form of Registration Rights Agreement, between the Company and each of RNI Limited Partnership, First
Empire Corporation, Greg A. Tucker and Michael Kesselbrenner(1)
4.4 Form of Subscription Agreement, between the Company and each of RNI Limited Partnership, First Empire
Corporation, Greg A. Tucker and Michael Kesselbrenner(1)
5 Opinion of Squadron, Ellenoff, Plesent & Sheinfeld, LLP(3)
23.1 Consent of PricewaterhouseCoopers LLP(2)
23.2 Consent of Squadron, Ellenoff, Plesent & Sheinfeld, LLP (contained in the Opinion filed as Exhibit 5)
24 Power of Attorney (included on the signature pages hereto)
27 Financial Data Schedule(1)( )
</TABLE>
- ------------------------
(1) Incorporated by reference to Amendment No. 1 to the Company's Annual Report
on Form 10-KSB for the fiscal year ended December 31, 1998.
(2) Previously filed.
(3) Filed herewith.
<PAGE>
EXHIBIT 5
[SEP&S LETTERHEAD]
July 30, 1999
Celerity Systems, Inc.
1400 Centerpoint Boulevard
Knoxville, Tennessee 37932
Re: Registration Statement on Form S-3
Ladies and Gentlemen:
You have requested our opinion, as counsel for Celerity Systems, Inc, a
Delaware corporation (the "Company"), in connection with the registration
statement on Form S-3 (the "Registration Statement"), filed with the Securities
and Exchange Commission under the Securities Act of 1933, as amended (the
"Act").
The Registration Statement relates to the registration by the Company of the
sale by the Company of up to 1,285,041 shares of common stock, par value $.001
per share, (the "Shares"), of the Company.
We have examined such records and documents and made such examinations of
law as we have deemed relevant in connection with this opinion. Based upon such
examinations, it is our opinion that, when there has been compliance with the
Act and the applicable state securities laws, the Shares, when issued, delivered
and paid for in accordance with the terms thereof, will be validly issued, and
the Shares, when so issued, delivered and paid for will also be fully paid and
nonassessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to our firm under the caption "Legal
Matters" in the Registration Statement. In so doing, we do not admit that we are
in the category of persons whose consent is required under Section 7 of the Act
or the rules and regulations of the Securities and Exchange Commission
promulgated thereunder.
Very truly yours,
/s/ Squadron, Ellenoff, Plesent &
Sheinfeld, LLP
