<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED
September 30, 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.
-----------------------------------------------------
(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 November 16, 1999, 4,898,296 shares of the issuer's common stock were
outstanding.
Transitional Small Business Disclosure Format (check one): Yes No X
----- -----
The Registrant hereby amends and restates Item 1 and Exhibit 27 in their
entirety.
<PAGE>
CELERITY SYSTEMS, INC.
FORM 10-QSB
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
INDEX
<TABLE>
<CAPTION>
Page
<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements....................................................................................3
Condensed Balance Sheets as of September 30, 1999 (unaudited) and
December 31, 1998.......................................................................................3
Condensed Statements of Operations (unaudited) for the six months ended
September 30, 1999 and 1998 and the nine months ended September 30,
1999 and 1998...........................................................................................4
Condensed Statement of Stockholders' Equity as of September 30, 1999
(unaudited) and January 1, 1999.........................................................................5
Condensed Statements of Cash Flows (unaudited) for the nine months ended
September 30, 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........................................................................20
Signatures..............................................................................................21
</TABLE>
2
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CELERITY SYSTEMS, INC.
Condensed Balance Sheets
Unaudited
<TABLE>
<CAPTION>
December 31, September 30,
1988 1999
Unaudited
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 18,273 $ 760
Accounts receivable, less allowance for doubtful
accounts of $436,472 in 1998 and 1999 280,315 264,361
Notes receivable 0 50,000
Inventory 1,206,611 833,061
Prepaid expenses 63,150 44,910
------------ ------------
Total current assets 1,568,349 1,193,091
Property and equipment, net 1,697,367 1,150,095
Intangible assets 0 19,866
------------ ------------
Total assets $ 3,265,716 $ 2,363,051
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable $ 821,814 $ 706,697
Accrued wages and related taxes 626,389 988,037
Accrued liabilities 172,140 151,279
Short-term notes payable -- 137,593
Current maturities of long-term debt and leases
payable 271,937 88,489
------------ ------------
Total current liabilities 1,892,280 2,072,095
Long-term debt and capital lease obligations,
less current maturities 397,955 1,044,630
------------ ------------
Total liabilities 2,290,235 3,116,726
Common stock, $.001 par value, 15,000,000
shares authorized; 4,748,847 issued and
4,411,483 outstanding, and 4,834,797 issued and
4,497,433 outstanding at December 31, 1998 and
September 30, 1999, respectively 4,749 4,923
Additional paid-in capital 22,626,174 23,164,241
Treasury stock, at cost (227,500) (227,500)
Accumulated deficit (21,427,942) (23,695,338)
------------ ------------
Total stockholders' equity 975,481 (753,674)
------------ ------------
Total liabilities and stockholders' equity $ 3,265,716 $ 2,363,051
------------ ------------
------------ ------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THESE UNAUDITED CONDENSED FINANCIAL STATEMENTS.
3
<PAGE>
CELERITY SYSTEMS, INC.
Condensed Statements of Operations
Unaudited
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------ --------------------
1998 1999 1998 1999
---------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues 15,900 -- 738,686 81,156
Cost of revenues 17,442 -- 814,406 19,647
---------- -------- ---------- ----------
Gross margin (1,542) -- (75,720) 61,509
Operating expenses 1,917,475 217,683 5,381,931 1,813,872
---------- -------- ---------- ----------
Loss from operations (1,919,017) (217,683) (5,457,651) (1,752,364)
Interest expense (10,450) -- (10,473) 477
Interest income 4,907 150,284 89,670 (137,625)
Other income -- (28,545) -- 17,785
---------- -------- ---------- ----------
Net loss from continuing operations 1,924,570 (95,944) (5,378,454) (1,871,727)
Discontinued operations (Note 1):
Income (loss) from operations of
discontinued CD-ROM segment -- 69,972 (113,559) 142,572
Loss on disposal 6,653 -- (8,705) --
---------- -------- ---------- ----------
Net loss (1,917,917) (25,972) (5,500,718) (1,729,155)
Basic and diluted loss per common share (Note 2):
Loss from continuing operations (0.46) 0.04 (130) (0.37)
Discontinued operations 0.00 0.00 (0.03) 0.01
Loss per common share (0.46) 0.03 (1.33) (0.36)
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THESE UNAUDITED CONDENSED FINANCIAL STATEMENTS.
4
<PAGE>
CELERITY SYSTEM, 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 $ 23,164,241 $(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 -- --
Conversion of convertible
debentures to comon
shares - Note 4 145 (145) -- --
Issuance of warrants to
purchase common stock -- 36,605 -- --
Net loss (unaudited) -- -- -- (1,729,155)
-------- -------------- --------- ------------
Balances, September 30, 1999 $ 4,923 $ 23,433,202 $(227,500) $(23,157,097)
-------- -------------- ---------- ------------
-------- -------------- ---------- ------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE UNAUDITED CONDENSED
FINANCIAL STATEMENTS.
5
<PAGE>
CELERITY SYSTEMS, INC.
Condensed Statements of Cash Flows
Unaudited
<TABLE>
<CAPTION>
Nine months ended
September 30,
---------------------------
(unaudited)
1998 1999
<S> <C> <C>
Cash flows from operating activities:
Net loss $(5,500,718) $(1,729,155)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 367,463 547,272
Loss on disposal of fixed assets 29,623 --
Warranty reserve (18,414) --
Provision for doubtful accounts receivable (47,009) (15,954)
Provision for inventory obsolescence --
Changes in current assets and liabilities:
Accounts receivable 669,581 15,954
Prepaid expenses 29,106 18,240
Inventory (411,319) 373,550
Costs in excess of billings on
uncompleted contracts 20,963 --
Accounts payable (324,631) (115,117)
Accrued payroll and payroll taxes -- 361,648
Accrued expenses 136,168 (20,861)
----------- -----------
Net cash used by operating activities $(5,049,187) (564,422)
Cash flows from investing activities:
Purchases of property and equipment (874,384) --
Proceeds from maturities of short-term instruments 1,229,788 --
Acquisition of debt financing, loan costs, and intangibles -- (87,025)
Issuance of short-term note receivable -- (50,000)
----------- -----------
Net cash provided (used) by investing activities 355,404 (137,025)
Cash flows from financing activities:
Principal payments on capital leases and long-term debt (16,318) (93,114)
Proceeds from issuance of long-term debt -- 600,000
Proceeds from issuance of short-terms notes payables
and warrants 155,000 174,198
Exercise of employee stock options 2,851
Net cash provided (used) by financing activities 138,682 683,935
----------- -----------
Net decrease in cash and cash equivalents (4,555,101) (17,512)
Cash and cash equivalents, beginning of period 4,592,975 18,273
----------- -----------
Cash and cash equivalents, end of period $ 37,874 761
=========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
6
<PAGE>
CELERITY SYSTEMS, INC.
Notes to Unaudited Financial Statements
1. Presentation of Unaudited Interim Financial Statements
Information in the accompanying interim financial statements and notes to
the financial statements for the interim periods as of and for the nine
months ended September 30, 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 nine month period ended September 30, 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>
SEPTEMBER 30,
-------------
1998 1999
---- ----
<S> <C> <C>
Loss
Basic and diluted:
Loss available to common stockholders $(5,500,718) $(1,729,155)
Shares
Basic and diluted:
Weighted-average common shares outstanding 4,116,711 4,828,265
</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 $431,000 and
$142,572 for the nine months ended September 30, 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 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 sagment will
be fully recovered and no write-down for impairment is necessary.
4. Convertible Debentures
The Company issued $600,000 in 9% convertible debentures. The debentures
have a term of 24 months and are convertible in to 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 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 subjet to mandatory conversion upon maturity.
5. The Company entered in to a Letter of Intent to merge with FutureTrak
International, Inc. FutureTrak is engaged in delivering integrated
entertainment/information products and services. The merger is subject
to shareholder approval and will continue to remain in the businesses
that they are currently engaged.
7
<PAGE>
THIS QUARTERLY REPORT ON FORM 10-QSB CONTAINS FORWARD LOOKING STATEMENTS THAT
INVOLVE CERTAIN RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD
DIFFER MATERIALLY FROM THE RESULTS DISCUSSED IN THE FORWARD LOOKING STATEMENTS.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
The following discussion should be read in conjunction with the financial
statements and notes thereto and other financial information appearing elsewhere
in this Form 10-QSB. Statements in this Management's Discussion and Analysis or
Plan of 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
nine months ended September 30, 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 fourth quarter of 1999. Originally, production of the next
round of units was expected for the second quarter of 1999, but lack of funding
has delayed this production run. 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
11 to Optelecom during the first quarter of 1999. In addition to the set top
boxes, Nortel also purchased a CTL 7000 digital video server, which is installed
in Ottawa, Canada.
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 1,000 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 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 subscribers with such units in their homes. HES has purchased
25 T 6000 digital set top boxes and associated hardware and software, which was
scheduled to ship in the second quarter of 1999,
9
<PAGE>
along with the CTL 9000 digital video server. However, HES's network was not yet
ready, and there were further refinements being made to the Battelle software;
at this point, that order is expected to ship in the third quarter or early in
the fourth quarter of 2000. The remainder of the units are expected to ship
within six months of that date. The value of this purchase order in total is
approximately $1,024,000. This is the first deployment of the Company'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. Toward that end, the
Company continued efforts 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. As part of this
effort, the Company, on April 27, 1999, entered into a Letter of Intent to merge
with FutureTrak International, Inc., a technology firm based in Pompano Beach,
Florida, which specializes in the multi-dwelling unit ("MDU") marketplace and
also on mobile television for boats. On August 10, 1999, the companies announced
the execution of a definitive merger agreement which contemplates the merger of
FutureTrak into a wholly-owned subsidiary of the Company in a transaction in
which the holders of FutureTrak capital stock would receive, subject to
adjustment, one share of the Company's common stock for each outstanding share
of FutureTrak common stock. As of the date of this Form 10-QSB, the holders of
FutureTrak capital stock would be entitled to receive in the aggregate 9,546,193
shares of the Company's common stock. Consummation of the merger is subject to a
number of conditions, including stockholder approval, and there can be no
assurance that the merger will be consummated on such terms or at all. The goal
of the companies is to complete the merger in early 2000. The companies believe
that by merging their activities and focusing primarily on the MDU industry,
they can achieve more rapid success than they would achieve individually.
Furthermore, large scale deployment of the T 6000 digital set top box and the
CTL 9000 digital video server in the MDU industry could reduce costs of these
devices, through economies of scale, to a degree that might allow them to
penetrate other markets.
The Company continues to pursue, separately and in conjunction with
FutureTrak, funding for the companies' activities. The Company has need of short
term, mezzanine and long term financing, since the cost of wiring and equipping
these MDUs and producing the necessary set top boxes and servers is quite
significant.
If the merger is consummated, the Company intends, through its
relationship with FutureTrak and potentially with other MDU companies, to
position its current products, the T 6000 digital set top box and the CTL 9000
and later version digital video servers, in MDU properties including apartments,
condominiums, townhomes, gated communities, and dormitories. The T 6000 digital
set top box currently allows for cable television, high speed (more than 1
Megabit per second) Internet, home security monitoring, healthcare monitoring,
security monitoring and, through an embedded web browser, the ability to be on
the Internet without the need for a separate personal computer. The Company
plans to incorporate satellite technology into the set top box to allow
reception and processing of signals from DirecTV-TM- and potentially other
satellite programming providers. It is the companies' belief that this family of
services will be very attractive to MDU dwellers. The companies have
collaborated to acquire a DirecTV-TM- system operator license and are working
with a number of companies to determine the best ways to promote the companies'
efforts in the MDU marketplace. The companies have
10
<PAGE>
also met with several other firms with the objective of finding MDU properties
in which to install and operate the companies' services. However, to date, no
MDU properties have been wired or installed and the companies do not currently
derive any revenue from the MDU marketplace. There can be no guarantee that the
companies will derive such revenues, or that they will be profitable, or that
the companies will obtain sufficient financing to wire and operate such
properties now or in the future.
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, although he is now receiving
some sales support from the sales staff at FutureTrak. The Company continues to
encounter a longer and more complex sales cycle and realize fewer sales than
previously anticipated. Although the T 6000 digital set top box has been in
production, the Company continues to add and improve functionality, and is
likely to be required to do so for most deployments. Because of the Company's
long term sales cycle and the pending merger, 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 proposed price for the sale of
one or both of the products, WorkWare and Mediator, within the CD-ROM
business unit. The Company anticipates selling one or both segments the next
six months. The segment had a net income from operations of approximately $0
for the three months ended September 30, 1999, and $0 for the nine months
ended September 30, 1999. The CD-ROM segment generated a net income from
operations of approximately $6,653 for the three months ended September 30,
1998 and a loss on disposal of the segment of approximately $113,559 for the
same period. The segment had a net loss from operations of approximately
$8,705 for the nine months ended September 30,1998. 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 continue to add functionality and
reduce cost. The Company has also entered into arrangements with other digital
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 ("GPTA") and the
Beijing Telecom
11
<PAGE>
Authority ("BTA"), final amounts due under these agreements from the prime
contractor, ViaGate Technologies, of approximately $224,000 have not yet been
paid. The Company has continued to work with ViaGate to get these final monies
paid to the Company, and expected payment in the second quarter of 1999.
However, this has not been the case, and ViaGate has not given any firm
indication as to when such monies would be paid. The Company has stopped all
support of the four units in China, pending resolution of this matter, and has
begun discussions with an international collections company with a view toward
collecting these amounts from ViaGate and/or GPTA and BTA. Should such
collection be necessary, there can be no assurance as to the amount, if any,
that would be collected by the Company.
The Company has also cooperated with Bescom, 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, which amounts have 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 two
interactive video customers that represented 100% of the Company's revenues
during the first half of 1999. Export sales represented 56% of the Company's
sales for 1998, 37% for the first quarter of 1999 and 0% for the second quarter
of 1999, and 0% for the third quarter of 1999, respectively.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30, 1998
REVENUES.
The Company had revenues of approximately $0 for the quarter ended
September 30, 1999, as compared to $15,900 for the same period in 1998. The
lack of revenues for the third quarter of 1998 was due to the Company
previously recognizing all of the revenue associated with its projects that
had been in progress prior to 1998 and the long sales cycle related to the
Company's products. The low revenues for the third quarter of 1999 were due
to 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. There were no sales of interactive video services in the
second or third quarter of 1999.
COSTS OF REVENUES.
The Company had costs of revenues of $0 in the third quarter of
1999, as opposed to approximately $17,742 in 1998. The Company had a gross
margin of $0 in the third quarter of 1999, as compared to a negative gross
margin of approximately $(1,542) for the same period in 1998.
12
<PAGE>
Costs of revenues in 1998 were related to 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 due to the fact that the Company
had no revenues during the second quarter of 1999, as opposed to the second
quarter of 1998, in which it had more activities underway related to the BTA
project.
OPERATING EXPENSES.
Operating expenses for the three months ending September 30, 1999 were
approximately $217,683 as compared to approximately $1,917,475 for the same
period in 1998. Operating expenses for the second 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 second
quarter of 1998 were due to the Company's efforts to achieve better performance
and prepare for their 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 from 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
intends to move to considerably less expensive space in late 1999 or early 2000.
The landlord may pursue remedies against the Company in respect to this breach.
INTEREST EXPENSE AND INCOME.
There was $150,284 interest expense in the third quarter of 1999, as
compared to approximately $4,907 in the third quarter of 1998. Interest
income in the third quarter of 1998 was approximately $10,460 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 $0 for the same period in 1999.
NET LOSS.
As a result of the above factors, net loss from continued operations
the quarter ended September 30, 1999, was approximately ($25,972) as compared
to approximately ($1,917,917) for the same period in 1998.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1998
REVENUES.
Revenues for the nine months ended September 30, 1999 were
approximately $81,156 as compared to $738,686 for the same period in 1998.
The revenue for the 1998 period was due to the Company's completion of its
BTA project in China. The Company achieved substantial completion of the
project at the end of March 1998.
13
<PAGE>
COSTS OF REVENUES.
Costs of revenues for the nine months ended September 30, 1999 were
approximately $19,647 as compared to approximately $19,647 for the same
period in 1998. The Company's gross margin was approximately $61,509 for the
nine months ended September 30, 1999 as compared to a negative gross margin of
approximately $(75,720) for the same period ended in 1998.
The decrease in costs of revenues was primarily due to the fact that
a significant portion of the sales generated during 1999 were for services
that had little or no associated costs. The majority of the costs of revenues
for the nine months ended September 30, 1998 was due to the completion of the
Company's BTA project and the recognition of the related costs on the
project. The remainder of the costs for 1998 was related to the Company's
efforts to conclude projects for which revenue had previously been recognized.
OPERATING EXPENSES.
Operating expenses for the nine months ended September 30, 1999 were
approximately $1,813,872 as compared to $5,381,931 for the same period in 1998.
As mentioned previously, operating expenses were significantly greater in all
areas during 1998 due to the Company's efforts to achieve better performance and
prepare for anticipated future growth.
INTEREST EXPENSE AND INCOME.
Interest expense in the first nine months of 1998 was $89,670, as
compared to approximately $137,625 in the first nine months of 1999. Interest
income in the first nine months of 1998 was approximately $10,473 primarily
due to the interest on funds earned in the Company's IPO. The Company had no
similar deposits on hand in 1999, so interest income was only approximately
$477 for same period in 1999.
NET LOSS.
As a result of the above factors, net loss for the nine months ended
September 30, 1999 was approximately $1,871,727 as compared to a net loss of
approximately $5,378,454 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.
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 directors 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
14
<PAGE>
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 September 30, 1999 of
approximately $760. The Company's cash position continues to be extremely
limited. In efforts to 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 half of 1999 due to its financial position and has
significantly scaled back its operations.
In June 1999, the Company received a loan from FutureTrak
International, Inc. of $25,000, which was half of an amount obtained by a loan
to FutureTrak by Ryan Capital Management Corp. The proceeds of that loan were
used for ongoing operating expenses. The loan amount of $50,000 and interest in
the amount of $10,000 was to be repaid on or before September 20, 1999 or such
time that a $2,500,000 bridge is funded.
Also in June 1999, the Company entered into a short-term loan agreement
in the amount of $100,000. Of this amount, $50,000 was loaned to FutureTrak. The
loan amount of $100,000 and interest in the amount of $20,000 was due on
approximately September 18, 1999. This loan is collateralized by shares of
FutureTrak and Celerity.
On July 2, 1999, the Company and FutureTrak consummated a joint
financing arrangement with a private investor of which the proceeds to the
Company were $500,000. Of that amount, $50,000 was reserved to pay the
Company's portion of a placement fee. The total loan amount of $1,000,000 and
interest amounting to $200,000 were to have been converted into FutureTrak
and Celerity shares on October 25, 1999; however, the conclusion has not
occured and the parties are considering renegotiating the terms of this
obligation. It was anticipated at the time these financings were done that
bridge financing would be available to repay these amounts, of which there
can be no assurance.
On June 23, 1999, FutureTrak entered into a two-year investment banking
agreement with Sands Brothers & Co., Ltd. of New York, under which Sands
Brothers would, among other things, advise the companies on capital raising
activities. Thus far, no funds have been realized
15
<PAGE>
through Sands Brothers under this agreement. In consideration for its financial
advisory services, Sands Brothers has received a fee of $50,000, paid equally by
the Company and FutureTrak, and will receive an additional $50,000 from the
first $500,000 bridge financing which they raise. FutureTrak ended its
relationship with Sands Brothers in November, 1999. However, Celerity has
continued the relationship and certain prospective financings are under
discussion. There can be no assurance that any proceeds will be raised by Sands
Brothers on favorable terms or at all.
The Company is looking at several other options in terms of improving
its cash situation. The Company is continuing its efforts, along with
FutureTrak, to arrange financing. The Company is also investigating 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 additional
financing. The Company also continues to seek buyers for the CD-ROM division,
either the Mediator or WorkWare segments, or both. As described above, 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,
and $224,000 from ViaGate Technologies/GPTA/BTA. 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 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 on January 1993, and through September 30, 1999,
the Company has an accumulated deficit of approximately $23,695,338. The Company
expects to incur operating losses for an indefinite future period. 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, Optelecom, 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.
The Company had no significant capital spending or purchase
commitments at September 30, 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.
16
<PAGE>
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 "millennium bug" or "year
2000 problem."
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 believes to have updated or modified these
systems at this time.
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
17
<PAGE>
believe that the year 2000 problem will have any significance 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 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 has developed contingency plans to be implemented as part
of its efforts to identify and correct year 2000 problems affecting its internal
systems. 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.
18
<PAGE>
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.
19
<PAGE>
PART II
OTHER INFORMATION
<TABLE>
<CAPTION>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
<S> <C> <C>
(a) Exhibits
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
</TABLE>
On September 14, 1999 and September 29, 1999, the Company filed a Form
8-K disclosing that the Company entered into an Amended and Restated
Agreement and Plan of Merger with FutureTrak International, Inc.
("FutureTrak") and FutureTrak Merger Corp., a wholly owned subsidiary
of the Company ("Merger Sub"), dated as of August 10, 1999, pursuant
to which, among other things, (a) Merger Sub was merged into
FutureTrak, with the result that FutureTrak became a wholly owned
subsidiary of the Company, (b) each share of common stock of FutureTrak
outstanding at the effective time of the merger (other than shares held
in FutureTrak's treasury) was converted into one share of common stock
of the Company, and (c) the name of the Company was changed to
FutureTrak Systems Inc.
20
<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: November 24, 1999
CELERITY SYSTEMS, INC.
(Registrant)
By: /S/ KENNETH D. VANMETER
-----------------------
Kenneth D. Van Meter
President and Chief Executive Officer
and Chairman of the Board
(Principal Executive Officer)
(Principal Financial Officer)
21
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JUN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 1
<SECURITIES> 0
<RECEIVABLES> 701
<ALLOWANCES> 436
<INVENTORY> 833
<CURRENT-ASSETS> 1,193
<PP&E> 2,812
<DEPRECIATION> 1,661
<TOTAL-ASSETS> 2,363
<CURRENT-LIABILITIES> 2,072
<BONDS> 1,044
0
0
<COMMON> 5
<OTHER-SE> (754)
<TOTAL-LIABILITY-AND-EQUITY> 2,363
<SALES> 81
<TOTAL-REVENUES> 81
<CGS> 20
<TOTAL-COSTS> 1,814
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (119)
<INCOME-PRETAX> (1,872)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,872)
<DISCONTINUED> 143
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,729)
<EPS-BASIC> (.39)
<EPS-DILUTED> (.38)
</TABLE>
