<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
/X/ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED
June 30, 2000
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/ / 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
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Celerity Systems, Inc.
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(Exact name of Registrant as specified in its Charter)
Delaware 52-2050585
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
122 Perimeter Park Drive
Knoxville, Tennessee 37922
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(Address of principal executive offices)
(423) 539-5300
-------------------------------
(Registrant's telephone number)
1400 Centerpoint Boulevard
Knoxville, Tennessee 37932
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(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 August 10, 2000, 12,097,351 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 JUNE 30, 2000
INDEX
<TABLE>
<CAPTION>
Page
PART I FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements.......................................................................3
Condensed Balance Sheets as of June 30, 2000 (unaudited) and
December 31, 1999..........................................................................3
Condensed Statements of Operations (unaudited) for the six months ended
June 30, 2000 and 1999.....................................................................4
Condensed Statement of Stockholders' Equity as of June 30, 2000
(unaudited) and January 1, 2000............................................................5
Condensed Statements of Cash Flows (unaudited) for the six months ended
June 30, 2000 and 1999.....................................................................6
Notes to Unaudited Financial Statements....................................................7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations......................................................................8
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K..........................................................13
Signatures................................................................................14
</TABLE>
<PAGE>
CELERITY SYSTEMS, INC.
Balance Sheets
Unaudited
<TABLE>
<CAPTION>
December 31, June 30, 2000
1999 (unaudited)
<S> <C> <C>
Assets
Cash $ 383 $ 449,301
Accounts receivable 31,500 --
Other receivables 28,000 4,300
Inventory, net 854,353 322,807
Prepaid expenses 24,000 116,975
------------ ------------
Total current assets 938,236 893,383
Property and equipment, net 104,686 129,019
Debt offering costs, net of accumulated amortization of $134,894
and $93,735 respectively 76,629 122,739
Other assets 109,186 107,978
------------ ------------
Total assets $ 1,228,737 $ 1,253,119
============ ============
Liabilities and Stockholders' Deficit
Accounts payable $ 984,341 $ 364,666
Accrued wages and related taxes 1,209,639 260,112
Accrued interest 224,622 119,645
Other accrued liabilities 309,513 100,960
Notes payable 557,252 130,000
Current maturities of long-term debt and capital lease obligations 401,173 120,000
------------ ------------
Total current liabilities 3,686,540 1,095,383
Long-term debt and capital lease obligations, less current maturities 904,280 1,429,579
------------ ------------
Total liabilities 4,590,820 2,524,962
Common stock, $.001 par value, 15,000,000 shares authorized, 6,269,521 issued
and 5,932,157 outstanding, and 12,086,835 issued and 11,749,171
outstanding at December 31, 1999 and June 30, 2000, respectively 6,270 12,087
Additional paid-in capital 23,695,245 29,062,069
Treasury stock, at cost, 337,364 shares at December 31, 1999 and
June 30, 2000 (227,500) (227,500)
Accumulated deficit (26,836,098) (30,118,499)
------------ ------------
Total stockholders' deficit (3,362,083) (1,271,843)
------------ ------------
Total liabilities and stockholders' deficit $ 1,228,737 $ 1,253,119
============ ============
</TABLE>
The accompanying notes are an integral part of these unaudited condensed
financial statements.
<PAGE>
CELERITY SYSTEMS, INC.
Condensed Statements of Operations
Unaudited
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1999 2000 1999 2000
<S> <C> <C> <C> <C>
Revenues $ 1,358 $ -- $ 81,156 $ --
Cost of revenues -- 685,313 19,647 685,313
--------- ----------- ----------- -----------
Gross margin 1,358 (685,313) 61,509 (685,313)
Operating expenses 534,845 945,119 1,596,189 1,896,895
--------- ----------- ----------- -----------
Loss from operations (533,487) (1,630,432) (1,534,680) (2,582,208)
Interest expense (123,293) (572,010) (287,909) (746,053)
Other income 46,445 7,895 46,807 9,549
--------- ----------- ----------- -----------
Loss from continuing operations (610,335) (2,192,984) (1,775,782) (3,318,712)
Discontinued operations:
Income (loss) on disposal of discontinued CD-ROM segment 12,518 (1,437) 72,600 36,311
--------- ----------- ----------- -----------
Net loss $(597,817) $(2,195,983) $(1,703,182) $(3,282,401)
========= =========== =========== ===========
Basic and diluted loss per common share (Note 2):
Loss from continuing operations $ (0.14) $ (0.22) $ (0.41) $ (0.39)
Discontinued operations 0.01 (0.00) 0.02 (0.00)
--------- ----------- ----------- -----------
Net loss per share $ (0.13) $ (0.22) $ (0.39) $ (0.39)
========= =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these unaudited condensed
financial statements.
<PAGE>
CELERITY SYSTEMS, INC.
Condensed Statement of Stockholders' Deficit
Unaudited
<TABLE>
<CAPTION>
Additional
Shares of Common Paid-In Treasury Accumulated
Common Stock Stock Capital Stock Deficit
<S> <C> <C> <C> <C> <C>
Balances, January 1, 2000 6,269,521 $ 6,270 $23,695,245 $(227,500) $(26,836,098)
Issuance of common stock 1,700,000 1,700 1,058,300
Exercise of employee stock options 16,000 16 2,759
Exercise of common stock warrants 177,500 178 135,923
Issuance of convertible debentures with
beneficial conversion feature 567,639
Issuance of common stock as payment of
certain consulting and directors' fees,
payroll and accounts payable items 847,963 848 1,037,084
Conversion of notes, accounts, wages and
related payroll taxes to shares of
common stock and warrants to purchase 1,575,238 1,575 1,830,993
357,464 shares ofcommon stock
Conversion of convertible debentures to 1,500,613 1,500 734,126
shares of common stock
Net loss (3,282,401)
---------- ------ ---------- -------- -----------
Balances, June 30, 2000 12,086,835 12,087 29,062,069 (227,500) (30,118,499)
========== ====== ========== ======== ===========
</TABLE>
The accompanying notes are an integral part of these unaudited condensed
financial statements.
<PAGE>
CELERITY SYSTEMS, INC.
Condensed Statements of Cash Flows
Unaudited
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1999 2000
<S> <C> <C>
Cash flows from operating activities:
Net loss $(1,703,182) $(3,282,401)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization 476,300 398,894
Noncash interest expense related to beneficial
conversion feature of debt 140,906 658,339
Noncash operating expense related to consulting fees -- 468,750
Provision for inventory obsolescence -- 683,750
Noncash operating expense related to payroll
and directors' fees -- 309,222
Changes in current assets and liabilities:
Accounts receivable 11,080 27,200
Prepaid expenses 8,413 16,400
Inventory (9,976) (152,204)
Accounts payable 24,435 (420,670)
Other current liabilities 484,018 (526,322)
----------- -----------
Net cash used in operating activitities (568,006) (1,819,042)
----------- -----------
Cash flows from investing activities:
Purchase of fixed assets (45,915)
Issuance of short-term note receivable (50,000)
----------- -----------
Net cash used in investing activitities (50,000) (45,915)
----------- -----------
Cash flows from financing activities:
Proceeds from short-term borrowings 137,553 130,000
Payments on short-term borrowings (30,000)
Proceeds from long-term debt 600,000 1,179,980
Principal payments on long-term debt and capital lease obligations (18,622) (30,000)
Proceeds from issuance of common stock 2,880 1,060,000
Proceeds from exercise of common stock warrants -- 136,100
Proceeds from exercise of common stock options -- 2,775
Financing and debt issue costs (87,025) (134,980)
----------- -----------
Net cash provided by financing activitities 634,786 2,313,875
----------- -----------
Net increase in cash and cash equivalents 16,780 448,918
Cash and cash equivalents, beginning of year 18,273 383
----------- -----------
Cash and cash equivalents, end of period $ 35,053 $ 449,301
=========== ===========
</TABLE>
The accompanying notes are an integral part of these unaudited condensed
financial statements.
<PAGE>
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
six months ended June 30, 1999 and 2000, 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 six month period ended June
30, 2000, are not necessarily indicative of the results that may be
expected for the year ending December 31, 2000. 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, 1999.
In June 1998, the FASB issued SFAS 133, Accounting for Derivative
Instruments and Hedging Activities and in July 1999 issued SFAS 137 which
deferred the effective date of SFAS 133, as it pertains to the Company, to
July 1, 2000. This statement has not had a material impact on the Company.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulleting No. 101, or SAB 101, Revenue Recognition in
Financial Statements, which provides guidance on the recognition,
presentation and disclosure of revenue in financial statements filed with
the SEC. SAB 101 outlines the basic criteria that must be met to recognize
revenue and provides guidance for disclosures related to revenue
recognition policies. It is effective for the fourth fiscal quarter of
fiscal years beginning after December 15, 1999. This statement has not had
a material impact on the Company.
In April 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44 (FIN 44) which clarifies the application of
Accounting Principles Board Opinion 25 for certain transactions. The
interpretation addresses many issues related to granting or modifying stock
options including changes in accounting for modifications of awards
(increased life, reduction of exercise price, etc.). It is effective
July 1, 2000 but certain conclusions cover specific events that occur
after either December 15, 1998 or January 12, 2000. The effects of applying
the interpretation are to be recognized on a prospective basis from July 1,
2000. FIN 44 has not had a material impact on the Company.
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>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- --------------------------
1999 2000 1999 2000
<S> <C> <C> <C> <C>
Loss
Basic and diluted:
Loss attributable to common stockholders $(597,817) $ (2,195,983) $(1,703,182) $(3,282,401)
Shares
Basic and diluted:
Weighted-average common shares outstanding 4,440,283 10,126,337 4,395,137 8,437,406
</TABLE>
<PAGE>
3. Issuance of Convertible Debentures
The Company issued $629,980 aggregate principal amount of 8% convertible
debentures in the first quarter of 2000. The debentures have a term of
three years and are convertible into the Company's common stock at a price,
at the option of the holder, equal to either (i) 75% of the average closing
bid price of the common stock for the five trading days immediately
preceding conversion, or (ii) $1.50 per share. Celerity may redeem the
debentures at a redemption price of 125% of the principal amount, plus
accrued interest. All outstanding principal and interest is subject to
mandatory conversion three years after issuance. The Company recorded debt
discount and additional paid in capital for the $110,394 fair value of the
beneficial conversion feature.
The Company issued $550,000 aggregate principal amount of 4% convertible
debentures in the second quarter of 2000. The debentures have a term of
four years and are convertible into the Company's common stock at a price,
at the option of the holder, equal to 75% of the average closing bid price
of the common stock for the five trading days immediately preceding
conversion. The Company recorded debt discount and additional paid in
capital for the $457,245 fair value of the beneficial conversion feature.
During the second quarter, the holders of all $550,000 of these debentures
exercised their option to convert into the Company's common stock. The
Company issued 836,298 shares of common stock in connection with these
conversions.
4. Accounts, Notes, Wages and Related Payroll Tax Conversion
In the first half of 2000, the Company converted $1,787,323 of outstanding
debt into common stock upon the initial closing of a private offering.
Investors in the private offering received 1,503,738 shares of the
Company's common stock, calculated at the average closing bid price of the
common stock for the five days immediately prior to acceptance of the
investor's subscription agreement less twenty percent. In addition,
investors received warrants to purchase common stock at the rate of one
warrant for each five dollars of debt converted. The warrants have an
exercise price of $1.44 and expire on April 9, 2003.
5. Issuance of Common Stock
In the first half of 2000, The Company issued 1,700,000 shares of common
stock in private placements for a value of $1,060,000.
6. Supplemental Cash Flow Information
During the first half of 2000, the Company issued 847,963 shares of common
stock with a value of $1,037,932 as payment for certain consulting and
directors' fees and certain payroll expenses.
In the first half of 2000, $735,626 of the convertible debentures were
converted into 1,500,613 shares of common stock.
Also in the first half of 2000, $1,814,970 of accounts, notes, wages and
related payroll taxes were converted into 1,575,238 shares of common stock
and warrants to purchase 357,464 shares of common stock.
<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 7. Management's Discussion and Analysis or Plan of Operation.
The following discussion should be read in conjunction with the
financial statements and notes thereto and other financial information appearing
elsewhere in this Form 10-QSB. Statements in this Management's Discussion and
Analysis or Plan of Operation and elsewhere in this Form 10-QSB that are not
statements of historical or current fact constitute "forward-looking
statements." Such forward-looking statements involve known and unknown risks,
uncertainties, and other factors including those set forth herein 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 statement 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. All sales were in Korea,
Israel, Taiwan and China. However, beginning in 1998, the Company has focused
its sales efforts in North America, and 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 1998 and, although on a much more limited basis,
through 1999 and into 2000 on the T 6000, while also seeking new projects for
the Company's digital video servers, which could be deployed with the T 6000
or other compatible set top boxes. The Company has produced its initial trial
run of the T 6000 set top boxes, which were manufactured by Taylor-White,
LLC, of Greeneville, Tennessee (Taylor-White"). The Company sold 13 of these
trial run boxes to Northern Telecom ("Nortel") in September 1998 for use in
their demonstration facility in Ottawa, Canada. In addition, Nortel purchased
a CTL 7000 digital video server. In December, 1999, the Company entered into
a manufacturing agreement with Global PMX Company, Limited, under which all T
6000 digital set top boxes are manufactured in Global PMX plants in Taiwan
and China. In June 2000 the Company entered into an agreement with nCUBE
Corporation which, among other things, provided that nCUBE will manufacture
the Company's CTL 9500 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 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, 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.
<PAGE>
Management has also focused on attempting to obtain the necessary
capital to maintain the Company's operations. 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 narrowed its sales efforts to those
which, the Company believes, have the best chance of closing in the near term.
With the departure of the Company's Vice President of Sales and Marketing in
October 1998, and through 1999, the Company's sales efforts were supervised by
its President. In March 2000, the Company hired a Sales Manager for North
America. The Company continues to encounter a longer and more complex sales
cycle and to 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,
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. The Company has not been
successful in finding a buyer for the segment which had revenues of $173,380
and $69,420 for the six months ended June 30, 1999 and 2000, respectively,
and has made the decision to expend no further resources in this effort.
Accordingly, assets related to this segment have been written down to zero
and, except for filling any miscellaneous customer orders which may be
received, this segment is completely inactive.
In connection with the Company's efforts to arrange financing,
including possible strategic investments, 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 marketplace. On August 10, 1999, the companies announced the
execution of a definitive merger agreement which contemplated the merger of
FutureTrak into a wholly-owned subsidiary of the Company. However, on December
7, 1999, the companies terminated the merger agreement. The Company originally
determined to merge with FutureTrak primarily because FutureTrak planned to
focus on the business of providing satellite television and other services to
multi housing unit projects and Celerity believed that its technology was well
suited for such projects. The merger was terminated primarily because efforts to
obtain necessary funding for the planned activities of the merged companies had
not proven successful.
The Company has indefinitely postponed any continued research and
development efforts related to the CTL 8500 digital baseband server, aimed at
the analog hospitality and cable market, and the CTL 10000, aimed at larger
system deployments. Future research and development efforts are being delayed
indefinitely. The Company has continued limited development on its CTL 7000 and
CTL 9000 digital video servers and software to add functionality and reduce
costs.
The Company has one interactive video customer that represented 50% of
the Company's revenues in 1999 and 0% in the first half of 2000, and one CD-ROM
customer which represented 94% of the Company's revenues in the first half of
2000. Export sales represented 35% of revenues for 1999, 0% for 2000,
respectively.
Results of Operations
Three months ended June 30, 2000 compared to three months ended June 30, 1999
Revenues
<PAGE>
The Company had no revenues for the quarter ended June 30, 2000, as
compared to approximately $1,400 for the same period in 1999. The primary reason
for this decrease is due to the lack of interactive video sales in the second
quarter of 2000. The low level of interactive video sales is a result of the
constrained sales and marketing activities caused by the Company's cash
situation. Sales of interactive video services in the second quarter of 1999
were to Optelecom.
Costs of Revenues
Costs of revenues were approximately $684,000 in the second quarter of
2000, as compared to $-0- in 1999. The Company had a negative gross margin of
approximately $684,000 in the second quarter of 2000, as compared to
approximately $1,400 for the same period in 1999. Costs of revenues in 2000 were
related to an increase in inventory obsolescence. During the second quarter of
2000, the Company reached an agreement with nCUBE Corporation under which nCUBE
will manufacture the Company's updated version of it's digital video server.
This updated version rendered obsolete portions of the raw material inventory
related to the former versions of the digital video servers.
Operating Expenses
Operating expenses for the three months ending June 30, 2000 were
approximately $945,000 as compared to approximately $535,000 for the same
period in 1999. This increase results from non-cash charges relating to the
payment in shares of common stock of the Company of directors' fees and
certain payroll items and consulting expenses. Facility expenses in the
quarter ended June 30, 2000 decreased when compared to the prior year as a
result of the relocation of the Company's operations to a significantly less
costly facility and the settlement with it's prior landlord to issues related
to the breach of a lease. Approximately $540,000 of the operating expenses in
the three months ended June 30, 2000 were non-cash.
Interest Expense
Interest expense in the second quarter of 2000 was approximately
$572,000 as compared to approximately $123,000 in the second quarter of 1999. Of
the amount in the second quarter of 2000, approximately $518,000 was non-cash
expense related to the features of certain debentures issued in the
first half of 2000.
Net Loss
As a result of the above factors, net loss from continuing operations
for the three months ended June 30, 2000, was approximately $2,193,000 as
compared to $610,000 for the same period in 1999.
Six months ended June 30, 2000 compared to six months ended June 30, 1999
Revenues
There were no revenues for the six months ended June 30, 2000 as
compared to approximately $81,000 for the same period in 1999. The primary
reason for this decrease is due to the lack of interactive video sales in 2000.
The low level of interactive video sales is a result of the constrained sales
and marketing activities caused by the Company's cash situation.
Costs of Revenues
Costs of revenues for the six months ended June 30, 2000 were
approximately $685,000 as compared to approximately $20,000 in 1999. The
Company's negative gross margin was approximately $685,000 for the six months
ended June 30, 2000 as compared to a gross margin of approximately $62,000 for
the same period in 1999.
<PAGE>
The increase in costs of revenues was primarily due to additional
inventory obsolescence associated with an agreement with nCUBE Corporation to
manufacture the Company's updated line of digital video servers. A significant
portion of the revenues generated in 1999 were for services that had little or
no associated costs.
Operating Expenses
Operating expenses for the six months ending June 30, 2000 were
approximately $1,897,000 as compared to $1,596,000 for the same period in 1999.
Operating expenses increase due to the engagement of consultants to assist the
Company with investor relations and investment banking and non-cash payments
of directors' fees for prior years services. These increases of approximately
$1,005,000 are all non-cash expenses. Amortization increased due to the
initial closing of a private offering in which approximately $1,787,000 of
outstanding debt was canceled in exchange for common stock and warrants
(Note 4). These increases were partially offset by a reduction in payroll,
facility and depreciation expenses of approximately $890,000 in 2000 from 1999.
These decreases reflect the Company's continuing efforts to conserve cash and
to minimize operating costs. Employment decreased from an average of
approximately 30 full time staff during the first quarter of 1999 to a
current level of approximately 5 during the first half of 2000. In January,
2000, the Company relocated to a significantly less costly facility. This
relocation resulted in the abandonment of certain leashold improvements and
furniture recorded as part of a capitalized lease which was returned.
Interest Expense
Interest expense in the first six months of 2000 was approximately
$746,000 as compared to approximately $288,000 in the first six months of 1999.
Of these amounts, approximately $670,000 and $141,000 in 2000 and 1999,
respectively, are non-cash expenses related to the convertible features of
certain debentures issued in 2000 and 1999.
Net Loss
As a result of the above factors, net loss from continuing operations
for the six months ended June 30, 2000 was approximately $3,319,000 as compared
to $1,776,000 for the same period in 1999.
Liquidity and Capital Resources
The primary source of financing for the Company since its inception has
been through the issuance of debt, convertible debt and common and preferred
stock.
The Company had cash balances on hand as of June 30, 2000 of
approximately $449,000. The Company's cash position continues to be uncertain.
The Company raised $600,000 between January 1999 and March 1999 and
$314,980 between October 1999 and December 1999 in private placements of
interest-bearing convertible debentures. In addition to the private placements
of convertible debentures in 1999, in September 1999 the Company entered
into a $5,000,000 Line of Credit Agreement. Advances against this Line of Credit
are in the form of 4% Convertible Debentures and became effective with the
filing of the registration statement underlying the Convertible Debentures in
April 2000. Since the registration became effective the Company has drawn
$550,000 against this line of credit.
In the first half of 2000, in addition to the Line of Credit draw
noted above, the Company received gross proceeds from a private placement of
convertible debt totaling $630,000 and received $136,000 from the exercise of
common stock warrants. During the six months ended June 30, 2000, the Company
canceled approximately $1,787,000 of outstanding debt upon the initial
closing of a private offering. Of such debt, approximately $665,000 was held
by the Company's officers and directors and approximately $377,000 was held
by other current and former employees. Investors in the private offering
received shares
<PAGE>
of the Company's common stock and warrants to purchase additional common shares.
In addition, during June 2000 an investor purchased 1,500,000 shares of the
Company's common stock for $1,020,000. The Company is looking at several other
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, which was released as part of a
settlement relating to a breach of a lease, 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. 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 raises 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 in January 1993 and through June 30, 2000, the
Company has an accumulated deficit of $30,118,499. The Company expects to incur
operating losses for the indefinite future as it continues to solidify its
technology and achieve some sales success. The Company is also continuing to
pursue its sales efforts by offering attractive pricing to close
sales in a timely manner. Since January 1, 1999, the Company has received new
interactive service orders from Hopkinsville Electric Service and Optelecom.
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 June 30, 2000 the Company had a negative net working capital of
approximately $202,000. The Company had no significant capital spending or
purchase commitments at June 30, 2000 other than certain facility leases and
inventory component purchase commitments required in the ordinary course of its
business.
The Company has no existing bank lines of credit.
Impact of Year 2000
The Year 2000 issue is the result of computer programs being written
using two digits instead of four to define the applicable year. Any of the
Company's computer programs that have time-sensitive software or facilities
or equipment containing embedded micro-controllers may recognize a date using
"00" as the year 1900 rather than the year 2000. This could cause a system
failure of miscalculations causing potential disruption of operations,
including, among other things, a temporary inability to process transactions,
send invoices or engage in similar normal business activities. Through July
2000, the Company has not experienced significant or material malfunctions in
its information technology (IT) systems as the result of Year 2000. The
Company believes it could experience minor malfunctions of its IT systems and
non-IT business systems not previously detected, but that these minor
malfunctions will not have a material impact on the Company's results of
operations or financial condition. As discussed below, the Company's
continued Year 2000 compliance in calendar 2000 is in part dependent on the
continued Year 2000 compliance of third parties. Through July, 2000, the
Company's key vendors and customers have not reported any significant Year
2000 compliance problems and the Company's financial results have not been
negatively impacted by Year 2000 failures of third parties. However, because
the Company's continued Year 2000 compliance in calendar 2000 is in part
dependent on the continued Year 2000 compliance of third parties, there can
be no assurance that the Company's efforts alone have resolved all Year 2000
issues or that key third parties will not experience Year 2000 compliance
failures as calendar year 2000 progresses. Based upon its efforts to date,
the Company believes that all mission critical hardware and software has been
vendor verified and tested as year 2000 compliant. The Company does not
expect the activities of the Year 2000 readiness program to have a material
adverse effect on the ongoing business operations of the Company.
<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
One report on Form 8-K was filed on July 11, 2000 (Item 5. Other
Events).
<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: August 14, 2000
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 and
Principal Financial Officer)
