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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
MARCH 31, 1999
[ ] 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.
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(Exact name of Registrant as specified in its Charter)
Delaware 52-2050585
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1400 Centerpoint Boulevard
Knoxville, Tennessee 37932
--------------------------------------------
(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 X No
As of May 21, 1999 4,349,990 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 MARCH 31, 1999
INDEX
Page
PART I FINANCIAL INFORMATION
Item 1. Financial Statements ............................................ 3
Condensed Balance Sheets as of March 31, 1999 (unaudited) and
December 31, 1998 ............................................... 3
Condensed Statements of Operations (unaudited) for the three
months ended March 31, 1999 and 1998 ............................ 4
Condensed Statement of Stockholders' Equity as of
March 31, 1999 (unaudited) ...................................... 5
Condensed Statements of Cash Flows (unaudited) for the
three months ended March 31, 1999 and 1998 ...................... 6
Notes to Unaudited Financial Statements ......................... 7
Item 2. Management's Discussion and Analysis or Plan of Operation ....... 9
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K ................................ 17
Signatures ...................................................... 18
2
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
CELERITY SYSTEMS, INC.
BALANCE SHEETS
MARCH 31,
DECEMBER 31, 1999
1998 (unaudited)
------------ ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 18,273 $ 55,203
Accounts receivable, less allowance for 280,315 286,396
doubtful accounts of $436,472 in 1998 and 1999
Inventory 1,206,611 1,215,084
Prepaid expenses 63,150 56,958
------------ ------------
Total current assets 1,568,349 1,613,641
Property and equipment, net 1,697,367 1,526,411
Offering costs, net of amortization 76,740
------------ ------------
Total assets $ 3,265,716 $ 3,216,792
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 821,814 $ 786,888
Accrued wages and related taxes 626,389 957,063
Accrued liabilities 172,140 192,776
Current maturities of long-term debt and leases payable 271,937 323,844
------------ ------------
Total current liabilities 1,892,280 2,260,571
Long-term debt and capital lease obligations, less current maturities 397,955 853,575
------------ ------------
Total liabilities 2,290,235 3,114,146
Common stock, $.001 par value, 15,000,000 shares authorized, 4,748,847 issued
and 4,411,483 outstanding, and 4,777,647 issued and 4,440,283 outstanding
at December 31, 1998 and
March 31, 1999, respectively 4,749 4,778
Additional paid-in capital 22,626,174 22,858,675
Treasury stock, at cost (227,500) (227,500)
Accumulated deficit (21,427,942) (22,533,307)
------------ ------------
Total stockholders' equity 975,481 102,646
------------ ------------
Total liabilities and stockholders' equity $ 3,265,716 $ 3,216,792
============ ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE UNAUDITED CONDENSED
FINANCIAL STATEMENTS.
3
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CELERITY SYSTEMS, INC.
CONDENSED STATEMENTS OF OPERATIONS
UNAUDITED
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1998 1999
------------ ------------
<S> <C> <C>
REVENUES $ 722,786 $ 79,798
COST OF REVENUES 705,155 19,647
------------ ------------
GROSS MARGIN 17,631 60,151
OPERATING EXPENSES 1,656,936 1,061,344
------------ ------------
LOSS FROM OPERATIONS (1,639,305) (1,001,193)
INTEREST EXPENSE (13) (164,616)
INTEREST INCOME 42,521 362
------------ ------------
NET LOSS FROM CONTINUING OPERATIONS (1,596,797) (1,165,447)
DISCONTINUED OPERATIONS ( NOTE 3) :
LOSS FROM OPERATIONS OF DISCONTINUED (231,719) --
CD-ROM SEGMENT
INCOME OF DISCONTINUED CD-ROM SEGMENT -- 60,082
------------ ------------
NET LOSS $ (1,828,516) $ (1,105,365)
============ ============
BASIC AND DILUTED LOSS PER COMMON SHARE
(NOTE 2) :
LOSS FROM CONTINUING OPERATIONS $ (0.38) $ (.27)
DISCONTINUED OPERATIONS (0.06) .02
------------ ------------
LOSS PER COMMON SHARE $ (0.44) $ (.25)
============ ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE UNAUDITED CONDENSED
FINANCIAL STATEMENTS.
4
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CELERITY SYSTEMS, INC.
CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY
UNAUDITED
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN TREASURY ACCUMULATED
STOCK CAPITAL STOCK DEFICIT
---------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCES, JANUARY 1, 1999 $ 4,749 $ 22,626,174 $ (227,500) $(21,427,942)
EXERCISE OF EMPLOYEE STOCK OPTIONS 29 2,851 -- --
ISSUANCE OF CONVERTIBLE DEBENTURES AT
A DISCOUNT FROM FAIR MARKET VALUE -- 229,650 -- --
NET LOSS -- -- -- (1,105,365)
---------------------------------------------------------------
BALANCES, MARCH 31, 1999 $ 4,778 $ 22,858,675 $ (227,500) $(22,533,307)
===============================================================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE UNAUDITED CONDENSED
FINANCIAL STATEMENTS.
5
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CELERITY SYSTEMS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
UNAUDITED
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1998 1999
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (1,828,516) $ (1,105,365)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 96,812 323,331
Loss on disposal of fixed assets 29,622 --
Changes in current assets and liabilities:
Accounts receivable 305,509 (6,081)
Interest receivable 4,954 --
Prepaid expenses (108,859) 6,192
Inventory (652,271) (8,473)
Costs in excess of bilings on
uncompleted contracts 20,963 0
Accounts payable (429,391) (34,926)
Accrued payroll and payroll taxes 330,674
Accrued expenses 288,990 20,636
------------ ------------
Net cash used in operating activities $ (2,272,187) $ (474,012)
Cash flows from investing activities:
Purchases of property and equipment (352,249) --
Investments in short-term instruments (9,394) --
------------ ------------
Net cash used in investing activities (361,643) --
Cash flows from financing activities:
Principal payments on capital leases -- (12,438)
Proceeds from issuance of notes payable -- 600,000
Offering costs -- (79,500)
Net proceeds from issuance of common stock 2,560 2,880
------------ ------------
Net cash provided by financing activities 2,560 510,942
Net increase (decrease) in cash and cash equivalents (2,631,270) 36,930
Cash and cash equivalents, beginning of period 4,592,975 18,273
------------ ------------
Cash and cash equivalents, end of period $ 1,961,705 $ 55,203
============ ============
</TABLE>
The accompanying notes are an integral part of these unaudited condensed
financial statements.
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CELERITY SYSTEMS, INC.
Notes to Unaudited Condensed Financial Statements
1. Presentation of Unaudited Interim Financial Statements
Information in the accompanying interim condensed financial statements
and notes to the financial statements for the interim periods as of and
for the three months ended March 31, 1998 and 1999, 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 three month period ended March 31, 1999, are
not necessarily indicative of the results that may be expected for the
year ending December 31, 1999. 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
of and for the period ended December 31, 1998.
2. Loss Per Share
Basic and diluted loss per share were computed by dividing the net loss by
the weighted average common shares outstanding during each period.
Potential common equivalent shares are not included in the computation of
per share amounts in the periods because the Company reported a loss and
inclusion of equivalents would be anti-dilutive.
Following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share:
<TABLE>
<CAPTION>
March 31,
------------------------------
1998 1999
<S> <C> <C>
Loss
Basic and diluted:
Loss available to common stockholders $ (1,828,516) $ (1,105,365)
Shares
Basic and diluted:
Weighted-average common shares outstanding 4,116,711 4,349,990
</TABLE>
3. Discontinued Operations
In February 1998, the Company decided to scale back its CD-ROM segment to
a maintenance mode of operations. The Company developed a formal plan of
disposal which became effective in May 1998. The Company is actively
seeking a buyer for the segment which had revenues of $47,473 and $146,384
for the three months ended March 31, 1998 and 1999, respectively. The
Company believes the most valuable assets for sale are the segment's
customer list and product source code which have no recorded value.
Inventory of $24,811 is available for sale and the Company continues to
sell the inventory as existing customers request such merchandise.
Management cannot determine which assets will remain at the time of
disposal. Management believes that the recorded value of furniture,
equipment and inventory relating to the CD-ROM segment will be fully
recovered and no write-down for impairment is necessary. There can be
no assurance that the Company will realize any proceeds from the
disposition of the segment.
4. Convertible Debentures
The Company issued $600,000 aggregate principal amount of 9%
convertible debentures in the first quarter of 1999. The debentures
have a term of two years and are convertible into the Company's common
stock at a price equal to the lessor of (i) 75% of the average closing
bid price of the common stock for the five days immediately preceding
the date of conversion, or (ii) four times
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the five-day average closing bid price for the five days immediately
preceding the date of closing. The Company may redeem the debentures at a
redemption price that ranges from 115% to 125% of the principal amount,
plus accrued interest. The debentures are subject to mandatory conversion
upon maturity.
5. 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 into the Company or a subsidiary of the Company.
FutureTrak is engaged in delivering integrated entertainment/information
products and services. Although the Company intends to consummate the
merger, no assurance can be given that the parties will reach a
definitive agreement concerning such merger or that the merger will be
consummated.
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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 OPERATIONS
The following discussion should be read in conjunction with the
unaudited condensed 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 Operations 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 and in the Company's Annual Report on Form 10-KSB
under the caption "Risk Factors" 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. Such
risks include, without limitation, the Company's history of losses and
accumulated deficit, and need for additional financing; risks applicable to
foreign sales, the lack of assurance of the Company's technological success,
competition and others. 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
Prior to 1998, the Company's major activity was selling digital video
servers in the interactive video services market, with all sales having been
made in Korea, Israel, Taiwan, and China. However, since early 1998, the Company
has focused its sales efforts in North America, and has developed and sold the
first production units of a new digital set top box, the T 6000. The Company has
continued to focus most of its development and production efforts during the
three months ended March 31, 1999 on enhancement of the T 6000 digital set top
box to add capabilities and reduce cost, in addition to integrating the T 6000
digital set top box with the networks and products of other companies to
facilitate sales. The Company produced its initial trial run of the T 6000
digital set top box in October, 1998, and now has a third generation unit ready
for production in the second quarter of 1999. The T 6000 digital set top boxes
are currently manufactured by Taylor-White, LLC, of Greeneville, Tennessee. The
Company sold 13 of these trial run boxes to Northern Telecom (Nortel) in
September 1998, and eleven to Optelecom during the first quarter of 1999. In
addition to the set top boxes, Nortel also purchased a CTL 7000 digital video
server.
In February, 1999, the Company received a purchase order from
Hopkinsville Electric Service ("HES") which included one CTL 9000 digital video
server and up to 1000 T 6000 digital set top boxes and associated hardware and
software. The software included 1,000 licenses for energy management software
developed for the Company by Battelle Laboratories ("Battelle") under a joint
marketing arrangement which was executed in January 1999. This software allows
the T 6000 digital set top box to remotely read the electric meter and to set
and control electric appliances throughout the home, potentially allowing
savings on electric bills for
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subscribers with such units in their homes. HES has purchased 25 T 6000 digital
set top boxes and associated hardware and software, which is due to ship, along
with the video server, during the second quarter of 1999, once HES's network is
ready. The remainder of the units are expected to ship late in 1999; the value
of this purchase order in total is $1,024,000. This is the first deployment of
Celerity's systems for an electric utility company, one of the Company's planned
major market opportunities.
Management has continued to focus, during 1999, on attempting to obtain
the necessary capital to maintain the Company's operations. The Company is
continuing to arrange financing, including possible strategic investment or
opportunities to sell some or all of the Company's assets and business, while
continuing to pursue sales opportunities. The Company has narrowed its sales
efforts to those which, the Company believes, have the best chance of closing in
the near term. The Company's sales efforts are now being supervised by its
President. The Company continues to encounter a longer and more complex sales
cycle and realize fewer sales than previously anticipated. Although the T 6000
is in production, the Company continues to add and improve functionality, and
may be required to do so for certain deployments. However, management believes
that the Company is now better positioned to become an important participant in
many of its key market segments. There can be no assurance that this will be the
case. Because of the Company's long term sales cycle, the period to period
comparisons set forth below may not be meaningful and may not necessarily be
indicative of the results that may be expected for future periods.
In February 1998, following the unsuccessful conclusion of the
Company's efforts to retain a qualified General Manager for its CD-ROM
segment, the Company decided to scale back the segment to a maintenance mode
of operations. The decision was also based on the continued decline in the
segment's revenues, and the Company's need to focus its efforts and resources
on the interactive video segment. The Company then developed a formal plan of
disposal which became effective in May 1998, and the Company now accounts for
the CD-ROM segment as a discontinued operation. The Company continues to seek
potential purchasers of this division. In order to facilitate purchase of the
division, the Company has markedly reduced the expected revenues from the
sale of one or both of the product segments, WorkWare and Mediator, within
the CD-ROM business unit. The Company anticipates selling one or both
segments during the second or third quarters of 1999 the segment had a net
income fro operations of approximately $60,000 for the three months ended
March 31, 1999. The CD-ROM segment generated a net loss from operations of
approximately $232,000 for the three months ended March 31, 1998. There can
be no assurance that the Company will realize any proceeds from the
disposition of the segment. Due to the discontinued status of the segment,
the remainder of management's discussion of the Company's financial results
does not include the CD-ROM segment.
The Company has indefinitely postponed any continued research and
development efforts related to CTL 8500 digital baseband server, aimed at the
analog hospitality and cable markets, and the CTL 10000 aimed at larger system
deployments. The Company has continued limited development of its CTL 7000 and
CTL 9000 digital video servers and software to add functionality and reduce
cost. The Company has also entered into arrangements with other digital
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server manufacturers such that they would offer the Company's T 6000 digital set
top box as part of end-to-end systems.
Although the Company has completed the short term contracts entered
into with the Guang Dong Public Telecommunications Authority and the Beijing
Telecom Authority ("BTA"), final amounts due under these agreements from the
prime contractor, ViaGate Technologies ("ViaGate"), of approximately $224,000
have not yet been paid. The Company continues to work with ViaGate to get these
final monies paid to the Company, and it is expected that such monies should be
collected during the second quarter of 1999. However, collection fees of up to
twenty per cent may be needed to be paid in order to get assistance in
collecting such amounts.
The Company has also cooperated with Bescom, Inc. the prime contractor
on the Korea Telecom project in their efforts, through arbitration in Korea, to
collect the final ten per cent due under that contract. This arbitration effort,
which is expected to be resolved in late 1999, could result in payments to the
Company of up to $485,000, such amounts having been previously written off.
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. In addition, the Company has experienced difficulties with respect
to certain of its foreign deployments. The Company had one interactive video
customer that represented 56% of the Company's revenues in 1998, and one
interactive video customer that represented 100% of the Company's revenues
during the first quarter of 1999. Export sales represented 56% of the Company's
sales for 1998, and 37% for the first quarter of 1999 respectively.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998
REVENUES
The Company has revenues of $79,798 for the quarter ended March 31,
1999, as compared to $722,786 for the same period in 1998. Primary reasons
for this difference were the lack of interactive video sales, the
discontinuance of the Company's CD-ROM division, and constrained marketing
activities due to the Company's cash situation. Sales of interactive video
services in the first quarter of 1999 were to Hopkinsville Electric Service
(HES) and to Nortel.
COSTS OF REVENUES
Costs of revenues were $19,647 in the first quarter of 1999, as
opposed to $705,155 in 1998. The Company had a gross margin of $60,151 in the
first quarter of 1999, as compared to $17,631 for the same period in 1998.
Costs of revenues in 1999 were for parts, labor, and contract activities
related to the T 6000 digital set top boxes to be sold to Hopkinsville
Electric Service and Optelecom. Costs of revenues in 1998 were related to
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completion of the BTA project and the initial tooling, and readying for
production, of the T 6000 digital set top box.
The decrease in costs of revenues was primarily due to the fact that
the Company had small revenues during the first quarter of 1999, as opposed to
the first quarter of 1998 in which it recognized the revenue from the BTA
project, and therefore there were few costs associated with the revenue for the
period.
OPERATING EXPENSES
Operating expenses for the three months ending March 31, 1999 were
$1,061,344 as compared to $1,656,936 for the same period in 1998. Operating
expenses for the first quarter of 1999 were significantly lower than 1998 due
to the Company's efforts to conserve cash and to minimize operating costs.
The majority of operating expenses in the first quarter of 1998 were due to
the Company's efforts to achieve better performance and prepare for
anticipated future growth. These expenses included operating wage expenses
and associated payroll taxes and other employee benefits due to the hiring of
additional personnel early in 1998. Another component of the increase in
operating expense was an increase in facility rental expense during 1998,
associated with the Company's move to a new facility. In 1998, the Company
also incurred expenses for marketing efforts. Expenses incurred for the use
of contractors, consultants, and recruiting efforts also were high in 1998
due to the Company's increased needs for quality personnel. During the same
period in 1999 the Company attempted to minimize such expenses and tried to
conserve available funds. 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 its landlord, the Company acknowledged
breach of its lease due to its failure to pay the required rental amount. The
Company and the landlord are still in negotiations to finalize the new rental
terms. The landlord may pursue remedies against the Company in respect of its
breach.
INTEREST EXPENSE AND INCOME
Interest expense in the first quarter of 1998 was $13,000 as compared
to $164,616 in the first quarter of 1999. Interest income in 1998 was $42,521
primarily due to the interest on funds earned in the Company's initial public
offering (IPO). The Company had no similar deposits on hand in 1999, so
interest income was $362.
NET LOSS
As a result of the above factors, net loss from continued operations
for the quarter ended March 31, 1999, was $1,105,365 as compared to
$1,828,516 for the same period in 1998.
LIQUIDITY AND CAPITAL RESOURCES
The primary source of financing for the company since its inception has
been through the issuance of common and preferred stock and debt and related
accrued interest.
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In November 1997, the Company consummated the IPO in which 2,000,000 in
Common Stock were sold at a purchase price of $7.50 per share. The Company
realized net proceeds of approximately $12,386,800 from the IPO, of which
approximately $5,446,000 was used to pay its outstanding debt and related
accrued interest.
In August 1998, the Company's President loaned the Company $55,000
on a short term basis for working capital needs. In September 1998, one of
the Company's Director's loaned the Company an additional $100,000 for
working capital uses. In October 1998, the Company amended its 401(k) plan to
allow participants in the plan to invest in the Company's common stock. The
Company's President allocated the entirety of his investments into the
Company's common stock in the approximate amount of $136,000 and the plan
purchased 155,028 shares on his behalf. Some additional employees purchased
substantially smaller amounts through their 401(k) plan under this program.
The Company has used these proceeds for working capital. In October and
November 1998, the Company received aggregate proceeds of $450,000 from a
private placement. Such proceeds included cancellation of $150,000 of
indebtedness from the Director and the President of the Company (see above).
Each investor in the private placement received a seven per cent promissory
note with a principal amount equal to the amount of the investment for the
term of one, two, or three years. Principal and interest are payable by the
Company at maturity. In addition, each investor received the right to a
royalty payment of $0.50 per $100,000 invested (pro rated for lesser
investments), for each T 6000 digital set top box sold during the period of
three to five years following the closing. The $450,000 received represents
the entire amount received in the private placement. Investors in the private
placement included certain Directors and Officers of the Company, as well as
outside investors. The Company also raised $600,000 between January 1999 and
March 1999 in a private placement. The funds from the private placements were
used for general operating expenses of the Company. The Company had cash
balances on hand as of March 31, 1999 of approximately $55,000. The Company's
cash position continues to be uncertain. In efforts control cash outflow, the
Company's Officers have elected to defer portions of their salaries since
August of 1998 and until such time as the financial position of the Company
will allow those deferrals to be repaid. The Company's President has not
taken any salary since the July 1998 pay period, and the Company is in
arrears in paying compensation to its employees. The Company has lost
employees either voluntarily or involuntarily in the second half of 1998 and
in the first quarter of 1999 due to its financial position and has
significantly scaled back its operations.
The Company is looking at several options in terms of improving its
cash situation. 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, while continuing to pursue sales
opportunities. The Company has granted a security interest in its property to
its Landlord and has granted a security interest in its personal property to one
of its legal counsel. Such security interest may hinder the Company's efforts to
obtain financing. The Company also continues to seek buyers for the CD-ROM
division, either the Mediator or WorkWare segements, or both. The Company is
taking additional steps to collect accounts receivable which have been reserved
in 1996 and 1997, including $429,000 from Korea Telecom/Bescom. There can be no
assurance that the Company will be able to obtain any such required additional
funds from any source on a timely basis, on favorable terms, or at all. The lack
of sales or a significant financial
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commitment raise a substantial doubt about the Company's ability to continue as
a going concern or to resume a full-scale level of operations.
Since its inception of January 1993, and through March 31, 1999, the
Company has an accumulated deficit of $22,533,307. The Company expects to
incur operating losses for an indefinite future as it continues to solidify
its technology and achieve some sales success. The Company is also continuing
to pursue its sales efforts and endeavoring to offer attractive pricing to
close sales in a timely manner. Since January 1, 1999, the Company has
received new interactive services and new CD-ROM orders from Hopkinsville
Electric Service, Optelcom, and the United States Navy, respectively. There
can be no assurance, however, as to the receipt or timing of revenues from
operations, including, in particular, revenues from products currently under
development.
As of March 31, 1999, the Company had negative net working capital of
approximately $647,000. The Company had no significant capital spending or
purchase commitments at March 31, 1999, other than certain facility leases
and inventory component purchase commitments required in the ordinary course
of its business.
The Company has no existing lines of credit.
On April 27, 1999, the Company entered into a Letter of Intent ("LOI")
with FutureTrak International, Incorporated ("FutureTrak"), a Nasdaq bulletin
board company, located in Pompano Beach, Florida, to enter into a merger. Under
the terms of this LOI, the companies would enter into a share for share merger
of FutureTrak into Celerity. The companies anticipate that they will enter into
a definitive merger agreement by July 1, 1999, and to consummate the merger,
subject to necessary regulatory filings and shareholder approval, sometime
during the third quarter of 1999. As part of this merger activity, the companies
are seeking interim financing in the form of bridge financing, and it is their
intention, as part of completing the merger, to enter into substantial
additional financing of the new combined company. There can be no assurances
that the merger will in fact occur, that it will occur in the period of time
anticipated, or that the current companies or the combined company will be able
to achieve necessary financing, or financing on acceptable terms.
YEAR 2000 ISSUES
BACKGROUND
Some computers, software, and other equipment include programming code
in which the calendar year date is abbreviated to only two digits. As a result
of this design decision, some of these systems could fail to operate or produce
correct results if "00" is interpreted to mean 1900 rather than 2000. These
problems are widely expected to increase in frequency and severity as the year
2000 approaches, and are commonly referred to as the "millenium bug" or "year
2000 problem."
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ASSESSMENT
The year 2000 problem could affect computers, software, and other
equipment used, operated, or maintained by the Company. Accordingly, the Company
is reviewing its internal computer programs and systems to ensure that the
programs and systems will accurately process date data (including, but not
limited to, calculating, comparing and sequencing dates) in connection with the
year change from December 31, 1999 to January 1, 2000, for the "year 2000
ready." The Company presently believes that its computer systems will be year
2000 ready in a timely manner. All the estimated costs of these efforts are not
expected to be material to the Company's financial position or any year's
results of operations, there can be no assurance to this effect.
SOFTWARE SOLD TO CONSUMERS
The Company believes that it has substantially identified and resolved
all potential year 2000 problems with any of the software products which it
develops and markets. However, management also believes that it is not possible
to determine with complete certainty that all year 2000 problems affecting the
software products have been identified or corrected due to the complexity of
these products, the fact that they incorporate third party software, and the
fact that these products interact with third party vendor products, and operate
on computer systems which are not under the Company's control.
INTERNAL INFRASTRUCTURE
The Company has begun to identify the major computers, software
applications, and related equipment, used in connection with its internal
operations that must be modified, upgraded, or replaced, to minimize the
possibility of a material disruption to its business. The Company has identified
major systems which, if affected by the year 2000 problem, might adversely
affect the Company's operations, and expects to have these systems updated or
modified by the middle of 1999.
SYSTEMS OTHER THAN INFORMATION TECHNOLOGY SYSTEMS
In addition to computers or related systems, the operation of office
and facilities equipment, such as fax machines, photocopiers, telephone
switches, security systems, and other common devices may be affected by the year
2000 problem; however, the Company does not believe that the year 2000 problem
will have a significant on its office and facilities equipment.
The Company estimates the total cost to the Company of completing any
required modifications, upgrades, or replacements of the internal systems will
not have a material adverse affect on the Company's business or results of
operations. This estimate will be revised, if required, should additional
information become available.
SUPPLIERS
The Company has initiated communications with third party suppliers of
the major computers, software, and other equipment used, operated, or maintained
by the Company, to
15
<PAGE>
identify and, to the extent possible, to resolve issues involving the year 2000
problem. However, the Company is limited or has no control over the actions of
these third party suppliers. Thus, while the Company expects that it will be
able to resolve any significant year 2000 problems with these systems, there can
be no assurance that these suppliers will resolve any or all year 2000 problems
before the occurrence of a material disruption to the business of the Company,
or any of its customers. Any failure of these third parties to resolve year 2000
problems in a timely manner could have a material adverse impact on the
Company's business, financial condition, and results of operations.
MOST LIKELY CONSEQUENCES OF YEAR 2000 PROBLEMS
The Company expects to identify and resolve all year 2000 problems that
could materially adversely affect its business operations in a timely manner.
However, management believes that it is not possible to determine with complete
certainty that all year 2000 problems affecting the Company have been identified
or corrected. The number of devices that could be affected and the interactions
among these devices are too numerous to identify specifically. In addition, one
cannot accurately predict how many year 2000 problem-related failures will
occur, or the severity, duration, or financial consequences of such failures. As
a result, management expects that the Company could encounter a number of
operational inefficiencies and inconveniences that may divert management's time
and attention, as well as financial and human resources from its ordinary
business activities. It may also encounter a number of serious system failures
that may require significant efforts by the Company or its clients to prevent or
alleviate material business disruptions.
CONTINGENCY PLANS
The Company is currently developing contingency plans to be implemented
as part of its efforts to identify and correct year 2000 problems affecting its
internal systems. The Company expects to complete its contingency plans by the
middle of 1999. Depending on the systems affected, these plans could include
accelerated replacement of affected equipment or software, short to medium term
use of back-up equipment and software, increased work hours for company
personnel, or use of contract personnel, to correct, on an accelerated schedule,
any year 2000 problems that arise, or to provide manual work-arounds for
information systems and similar approaches. If the Company is required to
implement any of these contingency plans, it could have a material adverse
affect on the Company's financial condition and the results of operation.
Based on the activities described above, the Company does not believe
that the year 2000 problem will have a material adverse affect on the Company's
business or results of operation. However, the Company's ability to achieve year
2000 readiness, and the level of incremental cost associated therewith, could be
adversely impacted by, among other things, the availability and cost of
programming and testing resources, vendors' ability to modify proprietary
software, and unanticipated problems identified in the on-going readiness
review.
16
<PAGE>
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit 11 Statement re: computation of per share earnings
(included in Note 2 of the "Notes to Unaudited
Financial Statements")
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K (None)
17
<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: May 24, 1999
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)
(Principal Financial Officer)
18
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