<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
/X/ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED
September 30, 2000
------------------
/ / 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
-------- ----------
(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 October 20, 2000, 12,704,409 shares of the issuer's common stock were
outstanding.
Transitional Small Business Disclosure Format (check one): Yes / / No /X/
<PAGE>
THIS QUARTERLY REPORT ON FORM 10-QSB CONTAINS FORWARD LOOKING STATEMENTS THAT
INVOLVE CERTAIN RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD
DIFFER MATERIALLY FROM THE RESULTS DISCUSSED IN THE FORWARD LOOKING STATEMENTS.
Item 2. Management's Discussion and Analysis or Plan of Operation.
The following discussion should be read in conjunction with the
financial statements and notes thereto and other financial information appearing
elsewhere in this Form 10-QSB. Statements in this Management's Discussion and
Analysis or Plan of Operation and elsewhere in this Form 10-QSB that are not
statements of historical or current fact constitute "forward-looking
statements." Such forward-looking statements involve known and unknown risks,
uncertainties, and other factors including those set forth herein 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 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.
Recent Stockholders' Meeting
On October 17, 2000, at the Annual Meeting of Stockholders, the
Company's stockholders approved an amendment to the Certificate of Incorporation
which increased the number of shares of Common Stock that the Board of Directors
may authorize and issue from 15 million to 50 million.
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.
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. 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. At this point, the Company
cannot be certain when the order will ship. 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.
On June 22, 2000, WIT Technologies, Inc. ("WIT") executed a written
agreement with the Company to buy digital video servers and all of its
requirements for the next five years for digital set top boxes. WIT is obligated
to order a minimum of 500,000 set top boxes. The Company estimates that, should
this obligation be fulfilled, this would result in approximately $275 million in
revenue over five years. If WIT fails to meet its minimum purchase obligation,
it must pay $100,000 in liquidated damages. On September 27, 2000, WIT placed
its first order for 100 of the Company's T 6000 set top boxes.
On August 10, 1999, the Company entered into a definitive agreement to
merge with FutureTrak International, Inc., a firm specializing in the
multi-dwelling unit marketplace, which contemplated the merger of FutureTrak
into a wholly-owned subsidiary of the Company. However, on December 7, 1999,
<PAGE>
the companies jointly terminated the merger agreement primarily because efforts
to obtain necessary funding for the planned activities of the merged companies
had not proven successful.
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.
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 Director of Sales and
Marketing. The Company continues to encounter a longer and more complex sales
cycle and to realize fewer sales than previously anticipated 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 $70,070 for the nine months
ended September 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.
The Company has one interactive video customer that represented 50% of
the Company's revenues in 1999 and 0% in the first three quarters of 2000, and
one CD-ROM customer which represented 94% of the Company's revenues in the first
three quarters of 2000. Export sales represented 35% of revenues for 1999, 0%
for 2000, respectively.
Results of Operations
Three months ended September 30, 2000 compared to three months ended September
30, 1999
Revenues
The Company had no revenues for the quarters ended September 30, 1999
and 2000. The lack of interactive video sales is a result of the constrained
sales and marketing activities caused by the Company's cash shortage.
Costs of Revenues
Costs of revenues were $-0- in both the third quarters ended September
30, 1999 and 2000 due to the lack of sales in those quarters.
<PAGE>
Operating Expenses
Operating expenses for the three months ending September 30, 2000 were
approximately $774,000 as compared to approximately $661,000 for the same period
in 1999. This increase results from increased legal, consulting and outside
engineering expenses, related to the updated version of the T 6000 set top box,
incurred in the current quarter. Facility expenses and depreciation in the
quarter ended September 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.
Interest Expense
Interest expense in the third quarter of 2000 was approximately $92,000
as compared to approximately $154,000 in the third quarter of 1999. This
reduction, resulting primarily from the conversion of convertible debentures in
the third quarter of 2000, is partially offset by liquidated damages due to the
delay in having an effective registration statement.
Loss from Continuing Operations
As a result of the above factors, loss from continuing operations for
the three months ended September 30, 2000, was approximately $881,000 as
compared to $811,000 for the same period in 1999.
Nine months ended September 30, 2000 compared to nine months ended September 30,
1999
Revenues
There were no revenues for the nine months ended September 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 shortage.
Costs of Revenues
Costs of revenues for the nine months ended September 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.
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 nine months ending September 30, 2000 were
approximately $2,671,000 as compared to $2,257,000 for the same period in 1999.
Operating expenses increased due to the engagement of consultants to assist the
Company with investor relations and investment banking, non-cash payments of
directors' fees, and increased legal expenses. Of these increases approximately
$1,031,000 are 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 at a beneficial
conversion rate (See Note 5 to the financial statements). These increases were
partially offset by a reduction in payroll, facility and depreciation expenses
of approximately $884,000 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 approximately 7 since that time through the third
quarter of 2000. In January, 2000, the Company relocated to a significantly less
costly facility. This relocation resulted in the
<PAGE>
abandonment of certain leasehold improvements and furniture recorded as part of
a capitalized lease which was returned
Interest Expense
Interest expense in the first nine months of 2000 was approximately
$838,000 as compared to approximately $442,000 in the first nine months of 1999.
Of these amounts, approximately $670,000 and $141,000 in 2000 and 1999,
respectively, are non-cash expenses related to the features of certain
debentures issued in 2000 and 1999, and approximately $89,000 in 2000 relate to
liquidated damages due to the late filing of certain registration statements.
Loss from Continuing Operations
As a result of the above factors, loss from continuing operations for
the nine months ended September 30, 2000 was approximately $4,200,000 as
compared to $2,586,000 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 September 30, 2000
of approximately $108,000. 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
the line of credit. This Line of Credit Agreement terminated on September 30,
2000 but was renewed as of October 16, 2000. This renewal was on substantially
similar terms and conditions as the prior agreement but was increased to a
maximum of $10,000,000 and extended to October 31, 2001.
During the nine months ended September 30, 2000, in addition to the
Line of Credit draw noted above, the Company received net proceeds from a
private placement of convertible debt totaling $562,500 and received $136,000
from the exercise of common stock warrants. During the nine months ended
September 30, 2000, the Company canceled, by converting to common stock and
warrants, 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
of the Company's common stock and warrants to purchase additional common shares.
In addition, during June 2000 a private investor purchased 1,500,000 shares of
the Company's common stock for $1,020,000. In the third quarter of 2000, the
Company received $369,000, net of offering costs, on the private placement of 41
shares of its Series A convertible preferred stock.
The Company is investigating several other options in terms of
improving its cash shortage. The Company continues to seek financing, including
possible strategic investment or opportunities to sell some or all of the
Company's assets and business, while continuing to aggressively pursue product
sales opportunities. The Company has granted a security interest in its property
to its landlord, which was promised to be 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 (which reduction began in March
<PAGE>
of 1999 due to departure of several employees and the reduction of the working
capital available to the Company).
Since its inception in January, 1993 and through September 30, 2000,
the Company has an accumulated deficit of $31,358,959. The Company expects to
incur operating losses for the indefinite future as it continues to advance its
technology and achieve increasing sales success. Since January 1, 1999, the
Company has received new interactive service orders from Hopkinsville Electric
Service and WIT Technologies. 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 September 30, 2000 the Company had a negative net working capital
of approximately $895,000. The Company had no significant capital spending or
purchase commitments at September 30, 2000 other than certain facility leases
and inventory component purchase commitments required in the ordinary course of
its business.
In October 2000, the Company filed a registration statement with the
Securities and Exchange Commission partly to register shares of common stock for
resale by certain selling stockholders and 7 million shares of common stock
which may be issued upon the conversion of convertible debentures issued in
connection with the Line of Credit Agreement noted above.
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. Through
September 2000, the Company has not experienced significant or material
malfunctions in its information technology (IT) systems as the result of Year
2000 nor have any of the Company's key vendors and customers reported any
significant compliance problems.
<PAGE>
CELERITY SYSTEMS, INC.
Balance Sheets
Unaudited
<TABLE>
<CAPTION>
September 30, 2000
December 31, 1999 (unaudited)
----------------- ------------------
<S> <C> <C>
Assets
Cash $ 383 $ 107,982
Accounts receivable 31,500 --
Other receivables 28,000 --
Inventory, net 854,353 374,179
Prepaid expenses 24,000 56,588
------------ ------------
Total current assets 938,236 538,749
Property and equipment, net 104,686 117,880
Debt offering costs, net of accumulated amortization of $134,894
and $127,634 respectively 76,629 71,344
Other assets 109,186 74,614
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Total assets $ 1,228,737 $ 802,587
============ ============
Liabilities, Redeemable Preferred Stock, Common stock and other
Stockholders' Equity (Deficit)
Accounts payable $ 984,341 $ 349,680
Accrued wages and related taxes 1,209,639 163,267
Accrued interest 224,622 198,572
Other accrued liabilities 309,513 172,452
Notes payable 557,252 130,000
Current maturities of long-term debt and capital lease obligations 401,173 420,000
------------ ------------
Total current liabilities 3,686,540 1,433,971
Long-term debt and capital lease obligations, less current maturities 904,280 879,579
------------ ------------
Total liabilities 4,590,820 2,313,550
Series A redeemable convertible preferred stock, $.01 par value, 50 shares
authorized, 0 and 41 shares issued and outstanding at
December 31, 1999 and September 30, 2000, respectively (aggregate
liquidation value at September 30, 2000 of $412,000) -- 494,460
Common stock and other Stockholders' Equity (Deficit)
Common stock, $.001 par value, 15,000,000 shares authorized, 6,269,521 issued
and 5,932,157 outstanding, and 12,512,448 issued and 12,175,084
outstanding at December 31, 1999
and September 30, 2000, respectively 6,270 12,512
Additional paid-in capital 23,695,245 29,568,524
Treasury stock, at cost, 337,364 shares at December 31, 1998 and September 30, 2000 (227,500) (227,500)
Accumulated deficit (26,836,098) (31,358,959)
------------ ------------
Total stockholders' equity (deficit) (3,362,083) (2,005,423)
------------ ------------
Liabilities, Redeemable Preferred Stock, Common stock and other Stockholders' Equity (Deficit) $ 1,228,737 $ 802,587
============ ============
</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 Nine Months Ended
September 30, September 30,
1999 2000 1999 2000
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues $ -- $ -- $ 81,156 $ --
Cost of revenues -- -- 19,647 685,313
----------- ----------- ----------- -----------
Gross margin -- -- 61,509 (685,313)
Operating expenses 660,809 774,396 2,256,998 2,671,292
----------- ----------- ----------- -----------
Loss from operations (660,809) (774,396) (2,195,489) (3,356,605)
Interest expense (153,841) (92,093) (441,750) (838,146)
Other income 4,183 (14,842) 50,990 (5,293)
Loss from continuing operations (810,467) (881,331) (2,586,249) (4,200,044)
Discontinued operations:
Income (loss) on disposal of discontinued CD-ROM segment 69,972 (1,218) 142,572 35,094
----------- ----------- ----------- -----------
Net loss $ (740,495) $ (882,549) $(2,443,677) $(4,164,950)
Amortization of beneficial conversion feature of Series A
redeemable convertible preferred stock (Note 4)- -- 9,652 -- 9,652
Accretion of preferred stock (Note 4) -- 348,260 -- 348,260
----------- ----------- ----------- -----------
Net loss applicable to common shareholders $ (740,495) $(1,240,461) $(2,443,677) $(4,522,862)
=========== =========== =========== ===========
Basic and diluted loss per common share (Note 2):
----------- ----------- ----------- -----------
Net loss per share $ (0.15) $ (0.10) $ (0.50) $ (0.45)
=========== =========== =========== ===========
</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>
Nine Months Ended
September 30,
-----------------------------
1999 2000
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(2,443,677) $(4,164,950)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization 644,980 477,484
Noncash interest expense related to beneficial
conversion feature of debt 229,650 658,339
Noncash operating expense related to consulting fees -- 567,197
Provision for inventory obsolescence -- 683,750
Noncash operating expense related to payroll
and directors' fees -- 327,090
Changes in current assets and liabilities:
Accounts receivable 15,954 31,500
Prepaid expenses 18,240 22,100
Inventory (84,176) (203,576)
Accounts payable (115,117) (421,561)
Other current liabilities 644,912 (471,582)
----------- -----------
Net cash used in operating activitities (1,089,234) (2,494,209)
----------- -----------
Cash flows from investing activities:
Purchase of fixed assets -- (48,567)
Issuance of short-term note receivable (50,000) --
----------- -----------
Net cash used in investing activitities (50,000) (48,567)
----------- -----------
Cash flows from financing activities:
Proceeds from short-term borrowings 137,593 200,000
Payments on short-term borrowings -- (100,000)
Proceeds from long-term debt 1,100,000 1,179,980
Principal payments on long-term debt and capital lease obligations (24,806) (60,000)
Proceeds from Series A preferred stock offering, net of offering costs -- 369,000
Proceeds from issuance of common stock -- 1,060,000
Proceeds from exercise of common stock warrants 36,605 136,100
Proceeds from exercise of common stock options 2,881 2,775
Financing and debt issue costs (130,551) (137,480)
----------- -----------
Net cash provided by financing activitities 1,121,722 2,650,375
----------- -----------
Net increase in cash and cash equivalents (17,512) 107,599
Cash and cash equivalents, beginning of year 18,273 383
----------- -----------
Cash and cash equivalents, end of period $ 761 $ 107,982
=========== ===========
</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 three month and nine month periods ended September 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
items) considered necessary for a fair presentation have been included.
Operating results for the three and nine month periods ended September
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 10K-SB of the Company as of and for the
year 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 fiscal year 2001. This statement is not expected to have 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
is not expected to have 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 issued related to granting or modifying
stock options including changes in accounting for modifications of awards
(increased life, reduction of exercise price, etc.). It was effective
July 1, 2000 but certain conclusions cover specific events that occurred
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. Adoption of FIN 44 did not had a material impact on
the Company.
The Company's financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the settlement of
liabilities and commitments in the normal course of business. The Company
has had recurring losses and continues to suffer cash flow and working
capital problems. Additionally, the lack of sales or a significant
financial commitment raises substantial doubt about the Company's ability
to continue as a going concern
The Company has focused on attempting to obtain the necessary capital to
maintain it's operations. Additionally, the Company has narrowed its
sales efforts to those which have the best chance of closing in the near
term. The Company believes that it is now better positioned to become an
important participant in many of its key market segments.
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.
<PAGE>
Following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------- -------------------------------
1999 2000 1999 2000
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Loss
Basic and diluted:
Loss attributable to common stockholders $ (740,495) $ (1,240,461) $ (2,443,677) $ (4,522,862)
Shares
Basic and diluted:
Weighted-average common shares outstanding 4,842,655 12,497,652 4,887,354 10,069,568
</TABLE>
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. This discount has been
amortized into interest expense.
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. This discount has been amortized into interest expense. 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 1,035,748 shares of common stock in connection with the
conversion of these 4% convertible debentures.
In addition there were 935,861 shares of common stock issued in
connection with conversion of $406,793 of convertible debentures
outstanding as of December 31, 1999.
4. Issuance of Series A Redeemable Convertible Preferred Stock
In August 2000, the Company consummated a private placement of 41 shares
of Series A redeemable convertible preferred Stock ("Preferred Stock"),
resulting in net proceeds of approximately $369,000. In addition to the
net proceeds warrants were issued to the placement agent as part of the
underwriting fee which had a fair market value of approximately $200,000.
This was recorded as a cost of the offering.
The Preferred Stock is convertible into shares of Common Stock at a
conversion price equal to the lesser of (i) $1.40 per share or (ii) 75%
of the average closing bid price of the common stock for the five trading
days immediately preceding the date of conversion. The Preferred Stock is
convertible no earlier than 90 days from its issuance or the date of
effectiveness of a registration statement registering the Common Stock
into which the Preferred Stock is convertible. All shares of Preferred
Stock outstanding on August 31, 2002 convert into shares of Common Stock
as if holders of such shares had delivered a conversion notice effective
at such date.
<PAGE>
The holders of two-thirds of the Preferred Stock can require the Company
to redeem their shares upon the occurrence of any of the following
events: (a) a merger where the Company is not the surviving entity, (b) a
sale of all or substantially of the the Company's assets, (c) failure to
maintain an effective registration statement, or (d) failure to comply
with certain other covenants . The amount payable upon such redemption
ranges from liquidation value to a premium of up to 120%. The Company, at
its option, can redeem the Preferred Stock upon payment of 125% of the
liquidation value. In the third quarter of 2000 the Company accreted the
carrying value of its Preferred Stock to 120% of liquidation value by
increasing the accumulated deficit by 348,260.
Each share of Preferred Stock has a liquidation preference of $10,000
plus an amount representing 6% per annum accrued since issuance. The
Preferred Stock does not pay a dividend.
On the date of issuance of the Preferred Stock, the effective conversion
price was at a discount to the price of the common stock into which the
Preferred Stock is convertible. The beneficial conversion feature will be
reflected as a dividend over the period until the stock is convertible.
The Company recorded a $9,652 dividend in the third quarter and will
record $24,290 in the fourth quarter.
5. 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 1,575,238 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.
Also during 2000, $1,288,994 of certain consulting and directors' fees,
payroll and accounts payable items were paid through the issuance of
802,580 shares of common stock at market value at time of payment.
6. 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 net of offering
costs..
7. Supplemental Cash Flow Information
During 2000, the Company issued 802,580 shares of common stock with a
value of $1,288,994 as payment for certain consulting and directors' fees
and certain payroll expenses.
Also during 2000, $956,793 of the convertible debentures were converted
into 1,971,609 shares of common stock.
Also in the first half of 2000, $1,832,568 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.
8. Subsequent Events
On October 17, 2000, at the Annual Meeting of Stockholders, the Company's
stockholders approved an amendment to the Certificate of Incorporation
which increased the number of shares of Common Stock that the Board of
Directors may authorize and issue from 15 million to 50 million.
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. This Line of Credit Agreement terminated on September 30, 2000 but
was renewed as of October 16,2000. This renewal was on substantially
similar terms and conditions as the prior agreement but was increased to
a maximum of $10,000,000 and extended to October 31, 2001.
<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 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)
