U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE
EXCHANGE ACT
For the transition period from ________ to ________
Commission file number: 0-20102
CELERITY SOLUTIONS, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 52-1283993
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation)
200 Baker Avenue, Suite 300
Concord, MA 01742
(Address of principal executive office)
(978) 287-5888
Issuer's telephone number
Check whether the issuer (1) 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 _____
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date:
Number Outstanding Shares
Title of Class as of November 11, 1997
-------------- -----------------------
Common Stock, $.10 Par Value 6,032,065
Transitional Small Business Disclosure Format: Yes _____ No __X__
Page 1 of 16
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CELERITY SOLUTIONS, INC.
SEPTEMBER 30, 1997
FORM 10-QSB
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of
September 30, 1997 and March 31,1997 3
Condensed Consolidated Statement of Operations for the
three and six months ended September 30, 1997 and 1996 4
Condensed Consolidated Statements of Cash Flows for the
six months ended September 30, 1997 and 1996 5
Notes to Condensed Consolidated Financial Statements 6
ITEM 2. Management's Discussion and Analysis or Plan of
Operation 8
PART II OTHER INFORMATION
ITEM 1. Legal Proceedings 14
ITEM 2. Changes in Securities 14
ITEM 3. Defaults Upon Senior Securities 14
ITEM 4. Submission of Matters to a Vote of Security Holders 14
ITEM 5. Other Information 15
ITEM 6. Exhibits and Reports on Form 8-K 16
Signatures 16
Page 2 of 16
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Celerity Solutions, Inc.
Condensed Consolidated Balance Sheet
<TABLE>
<CAPTION>
September 30 March 31
1997 1997
------------------------------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 3,344,576 $ 760,065
Short-term investments 249,140 997,036
Accounts receivable, net of allowance for doubtful accts 982,325 1,027,307
Notes and guaranteed royalties receivable 250,000 250,000
Prepaid expenses and other current assets 136,935 76,602
------------------------------
Total current assets 4,962,976 3,111,010
Property and equipment: 955,207 1,629,249
Less: accumulated depreciation and amortization (581,908) (970,874)
------------------------------
373,299 658,375
Notes and guaranteed royalties receivable 1,111,112 1,073,600
Goodwill net of accumulated amortization 785,823 827,182
Other long-term assets 195,942 240,872
------------------------------
Total assets $ 7,429,152 $ 5,911,039
==============================
Liabilities and shareholders' equity
Current liabilities:
Accounts payable and accrued liabilities $ 442,838 $ 430,768
Unearned revenue and other current liabilities 402,785 395,382
------------------------------
Total current liabilities 845,623 826,150
Notes payable to related parties 1,552,069 1,552,069
Deferred rent 77,582 83,328
------------------------------
Total liabilities 2,475,274 2,461,547
Shareholders' equity:
Common stock, $.10 par value 685,715 685,715
Additional paid-in capital 16,747,202 16,747,202
Accumulated deficit (10,428,695) (11,933,081)
------------------------------
7,004,222 5,499,836
Less treasury stock, at cost (2,050,344) (2,050,344)
------------------------------
Total shareholders' equity 4,953,878 3,449,492
------------------------------
Total liabilities and shareholders' equity $ 7,429,152 $ 5,911,039
==============================
</TABLE>
See accompanying notes.
Page 3 of 16
<PAGE>
Celerity Solutions, Inc.
Condensed Consolidated Statements of Operations
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30 September 30
1997 1996 1997 1996
---------------------------- ----------------------------
--(Unaudited)-- --(Unaudited)--
<S> <C> <C> <C> <C>
Revenue:
Services $ 1,000,672 $ 280,409 $ 1,796,920 $ 903,909
Software licenses 138,327 46,752 261,048 435,801
---------------------------- ----------------------------
Total revenue 1,138,999 327,161 2,057,968 1,339,710
Cost of services 578,185 1,103,082
---------------------------- ----------------------------
Gross Margin 560,814 327,161 954,886 1,339,710
Operating expenses:
Research and development 181,579 665,287 404,376 1,214,439
General and administrative 331,177 301,746 654,965 729,006
Sales and Marketing 205,480 329,824
Consolidation charges 462,566 462,566
Amortization of goodwill and
developed Software 30,680 61,360
---------------------------- ----------------------------
Total operating expenses 748,916 1,429,599 1,450,525 2,406,011
Operating income (loss) (188,102) (1,102,438) (495,639) (1,066,301)
Other income (expense):
Interest and other income, net 67,241 75,666 136,038 135,669
Interest expense (47,652) (95,304)
Gain on sale of assets -- 2,037,104 --
---------------------------- ----------------------------
Income (loss) before income taxes (168,513) (1,026,772) 1,582,199 (930,632)
Provision for income taxes 813 -- 77,813 14,400
---------------------------- ----------------------------
Net income (loss) $ (169,326) $(1,026,772) $ 1,504,386 $ (945,032)
============================ ============================
Net income (loss) per share (.03) (.21) .24 (.20)
============================ ============================
Weighted average shares outstanding 6,032,065 4,832,065 6,959,393 4,832,065
============================ ============================
</TABLE>
See accompanying notes.
Page 4 of 16
<PAGE>
Celerity Solutions, Inc.
Condensed Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Six Months Ended
September 30
1997 1996
----------------------------
--(Unaudited)--
<S> <C> <C>
Operating Activities
Net (loss) income $ 1,504,386 $ (945,032)
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation of property and equipment 106,788 92,015
Amortization of Goodwill and developed software 61,360 --
Gain on sale of assets (2,037,104) --
Changes in assets and liabilities (net of effect from
disposition):
Accounts receivable (122,520) (67,607)
Prepaid expenses and other current assets (69,271) 113,715
Long-term notes, royalties, and other assets (20,223) (39,012)
Accounts payable and accrued liabilities (71,479) 483,504
Unearned revenue and deferred rent 85,208 (51,711)
----------------------------
Net cash used in operating activities (562,855) (414,128)
Investing Activities
Purchases of short-term investments -- (404,165)
Proceeds from sales of short-term investments 747,896 326,210
Proceeds from sale of assets 2,509,757 --
Capital expenditures (110,287) (128,094)
----------------------------
Net cash (used in) provided by investing activities 3,147,366 (206,049)
Financing Activities
Proceeds from sale of common stock -- --
----------------------------
Net cash provided by financing activities -- --
----------------------------
Net (decrease) increase in cash and cash equivalents 2,584,511 (620,177)
Cash and cash equivalents at beginning of period 760,065 1,961,393
----------------------------
Cash and cash equivalents at end of period $ 3,344,576 1,341,216
============================
</TABLE>
See accompanying notes.
Page 5 of 16
<PAGE>
CELERITY SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Statement of Information Provided
The accompanying unaudited condensed consolidated financial statements, which
are for interim periods, have been prepared in accordance with Form 10-QSB
instructions and do not include all disclosures provided in the annual
consolidated financial statements. These unaudited condensed consolidated
financial statements should be read in conjunction with the consolidated
financial statements and the footnotes thereto contained in the Annual Report on
Form 10-KSB for the year ended March 31, 1997 of Capitol Multimedia, Inc. (the
"Company"), as filed with the Securities and Exchange Commission. These results
have been determined on the basis of generally accepted accounting principles
and practices applied consistently with those used in the preparation of the
Company's March 31, 1997 Annual Report on Form 10-KSB. The March 31, 1997
balance sheet was derived from audited consolidated financial statements, but
does not include all disclosures required by generally accepted accounting
principles.
2. Reclassifications
Certain amounts in the September 30, 1996 Statement of Operations and Statement
of Cash Flows have been reclassified to conform to the September 30, 1997
presentation.
3. Sale of select multimedia assets and acquisition of Client Server
Technologies, Inc. (CSTI)
On April 16, 1997, the Company sold selected multimedia assets to Davidson &
Associates (Davidson) for $2,509,759 in cash. The assets that were sold include
machinery and capital equipment utilized in art, animation and audio production
in St. Petersburg, Russia, and Concord, Mass. The net asset value of assets
transferred was $472,655. As part of the transaction, the Company amended its
software development contract with Blizzard Entertainment (the Company was paid
all related receivables from the contract), entered into a work-for-hire
agreement with Davidson related to software engineering services, and assigned
and transferred its present Concord, Massachusetts office lease to Davidson. The
Gain on Sale resulting from this transaction was $2,037,104.
On March 31, 1997, the Company acquired all of the outstanding stock of Client
Server Technologies,Inc.(CSTI) for $3,853,060. The purchase price was composed
of 1,200,000 unregistered shares of the Company's common stock discounted to a
value of $1,050,000, issuance of non-interest bearing convertible long-term
notes totaling $1,945,000 to sellers and discounted to a value of $1,552,069,
and cash payments totaling $1,250,991. Debt holders have the right to convert
$945,000 out of the $1,945,000 in interest and principal under the notes into
shares of common stock at a $3.00 per share conversion price in December 1998.
The transaction was accounted for under the purchase method of business
combinations. As a result of the acquisition, $827,182 of goodwill was recorded
which will be amortized on a straight line basis over 10 years, and $2,200,000
of "In-Process Technology" which was written off at March 31, 1997.
Page 6 of 16
<PAGE>
CELERITY SOLUTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Supplemental pro forma results of operations for the three and six months ended
September 30, 1997 and 1996, assuming the above sale and acquisition were
consummated prior to April 1, 1996, are presented below.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30 September 30
1997 1996 1997 1996
---------------------------- ----------------------------
--(Unaudited)-- --(Unaudited)--
<S> <C> <C> <C> <C>
Total revenue $ 1,138,999 $ 1,223,764 $ 2,057,968 $ 2,527,406
Cost of services 578,185 503,222 1,020,534 901,851
---------------------------- ----------------------------
Gross margin 560,814 720,542 1,037,434 1,625,555
Operating expenses:
Research and development 181,579 180,804 404,376 401,021
General and administrative 331,177 375,973 654,965 813,240
Sales and marketing 205,480 109,132 329,824 215,699
Consolidation charges 462,566 462,566
Amortization of goodwill and
developed software 30,680 30,680 61,360 61,360
---------------------------- ----------------------------
Total operating expenses 748,916 1,159,155 1,450,525 1,952,886
Operating income (loss) (188,102) (438,613) (413,091) (327,331)
Other income:
Interest and other income, net 67,241 116,309 136,038 201,823
Interest expense (47,652) (45,000) (95,304) (90,000)
Gain on sale of assets
---------------------------- ----------------------------
Income (loss) before income taxes (168,513) (367,304) (372,357) (216,508)
Provision for income taxes 14,628
---------------------------- ----------------------------
Net income (loss) $ (168,513) $ (367,304) $ (372,357) $ (231,136)
============================ ============================
Net income (loss) per share (.03) (.06) (.06) (.04)
============================ ============================
Weighted average shares outstanding 6,032,065 6,032,065 6,032,065 6,032,065
============================ ============================
</TABLE>
4. Subsequent Event
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, Earnings per Share, which is required to be adopted for periods ending
after December 17, 1997 including interim periods. At that time, the Company
will be required to change the method currently used to compute earnings per
share and to restate all prior periods. Under the new requirements for
calculating primary earnings per share, the dilutive effect of stock options
will be excluded. The impact of this new pronouncement has not been presented
since the Company has not computed the effect at this time.
Page 7 of 16
<PAGE>
CELERITY SOLUTIONS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Business Developments
During the quarter ended June 1997, the Company sold certain of its
multimedia assets to Davidson, a division of CUC International, Inc. The Company
retained all rights to its fourteen (14) multimedia CD-ROM products currently on
the market, three (3) new CD-ROM titles , all software tools and engines, and
software development capabilities in the United States and Russia. The Company's
current CD-ROM products are targeted primarily at children ranging from 3 to 14
years of age and are distributed by Davidson and Broderbund Software Inc.
(Broderbund).
The quarter ended June 30, 1997 is the first quarter to include results
from CSTI which the Company acquired on March 31,1997. This acquisition provided
the Company an entry into the supply chain management sector of the business
software market, encompassing the planning and control of material and resources
from order entry through warehousing and logistics to customer delivery. During
the quarter, CSTI signed license and service arrangements with Teleport
Communications Group Inc. (TCG) and Nortel Communications (Nortel) valued in
excess of nine hundred thousand dollars ($900,000). Revenue from these
agreements should be recognized over the balance of fiscal 1998. During the
quarter ended September 30, 1997 the Company signed several additional license
and service arrangements valued at approximately five hundred thousand dollars
($500,000) which should also be recognized during the remainder of fiscal 1998.
Presentation
Since the Company's April 1997 sale of select multimedia assets and the
March 1997 acquisition of CSTI, the Company has focused on the supply chain
management segment of the business software market, but continues to sell
existing multimedia software titles through its distribution channels.
Accordingly, the discussion and analysis of the Company's results of operations
compares pro forma results for the three and six month periods ended September
30, 1997 to pro forma results for the three and six month periods ended
September 30, 1996. This pro forma presentation, which is included in the notes
to condensed consolidated financial statements, assumes that the sale and
acquisition had occurred on March 31, 1996. The Company believes such comparison
provides a more meaningful analysis of current and prior fiscal year results.
Net Sales
The composition of pro forma net sales for the three and six months ended
September 30, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30 September 30
1997 1996 % Change 1997 1996 % Change
---- ---- -------- ---- ---- --------
<S> <C> <C> <C> <C> <C> <C>
Business software $1,051,555 $ 997,012 6% $1,938,174 $1,911,605 1%
Multimedia consumer software sales
and royalties 87,444 226,752 (61%) 119,794 615,801 (81%)
----------------------------------------------------------------------------
Total net sales $1,138,999 $1,223,764 (7%) $2,057,968 $2,527,406 (19%)
============================================================================
</TABLE>
Page 8 of 16
<PAGE>
CELERITY SOLUTIONS, INC.
Net Sales, continued
Revenues from business software increased $54,543 or 6% and $26,569 or 1%
on a pro forma basis for the three and six months ended September 30, 1997
versus the comparable periods in 1996. This increase is attributable to
increases in consulting revenue partially offset by decreases in software
license and support maintenance revenues. License revenue recognition fluctuates
with customer acceptance of the delivered product and product sales to new and
existing customers. The decrease in license revenue from the corresponding six
months in 1996 is a timing difference related to the acceptance of licenses. The
Company continues to expand all phases of sales and marketing in order to
generate long-term business software sales growth. The Company expects that
business software revenue will increase above fiscal 1997 levels during fiscal
1998.
Consumer software sales and royalties decreased $139,308 or 61% and
$496,007 or 81% on a pro forma basis for the three and six months ended
September 30, 1997 versus the comparable periods in 1996 primarily due to the
continued competitive conditions of the edutainment CD-ROM market, oversupply of
juvenile edutainment CD-ROM products, intensified competition and limited retail
shelf space. During the six months ended September 30, 1996 the Company
recognized five hundred and twenty thousand dollars ($520,000) in prepaid
royalty revenue from the release of three foreign title releases and one
domestic title release. The Company will not develop new multimedia products in
the foreseeable future, but has three (3) completed action adventure titles to
sell or license. The Company entered into a distribution agreement in April,
1997 with Davidson to distribute its Magic Tales series under the Fisher Price
label. The Company's outlook on revenue from consumer software sales and
royalties for the current fiscal year is dependent on the sale or license of the
three new multimedia products. With the Company's decision to sell its
multimedia assets and to discontinue all development of multimedia titles, it
expects that royalty revenue will continue to decline in future periods.
The level of net sales realized by the Company in any quarter is
principally dependent on the portion of projects completed, the number of new
software licenses sold and the number of titles shipped for published consumer
software titles. The purchase of supply chain management solutions requires a
significant commitment of capital and resources on the part of the customer, the
sales cycles are long and average from six to nine months. As a result, revenue
recognition is subject to many risks such as budgetary cycles, changes in the
business of a customer and overall economic trends that are not controllable by
the Company. Quarterly results have varied significantly in the past and are
likely to fluctuate in the future as a result of the timing of new orders,
product development expenditures, the number and timing of new product
completions, and multimedia product shipments and returns. A significant portion
of the Company's operating expenses are fixed and planned expenditures in any
given quarter are based on sales and revenue forecasts. Accordingly, if net
sales do not meet the Company's expectations in any given quarter, operating
results and financial condition could be adversely and disproportionately
affected. As a result of these and other factors, the Company's results of
operations and financial condition for any period are inherently difficult to
predict. Any significant change from levels expected by securities analysts or
shareholders could result in substantial volatility in the trading price of the
Company's common stock.
Cost of Services
Cost of services are incurred in connection with the sale of supply chain
management software. It consists of costs associated with consulting and
implementation services that are sold as part of a total supply chain management
solution, and costs associated with providing support to customers. These costs
increased $74,963 or 15% and $118,683 or 13% during the three and six pro forma
months ended September 30, 1997 versus 1996. Cost of services as a percentage of
revenue from services increased only 5% for the six months ended September 1997
versus 1996. The
Page 9 of 16
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CELERITY SOLUTIONS, INC.
Cost of Services, continued
Company has increased its consulting staff in anticipation of growing consulting
revenue. To the extent that the Company's consulting revenues do not increase at
anticipated rates, the hiring of additional consultants could adversely affect
the Company's gross margins. The Company expects this expense to increase in
absolute dollars, but not as a percentage of sales during fiscal 1998.
Research and Development
Research and development expense increased $775 or less than 1% and $3,355
or 1% during the three and six pro forma months ended September 30, 1997 versus
the comparable periods in 1996. Research and development costs as a percentage
of total business software sales was 21% for both six month periods. The Company
expects research and development to increase during fiscal year 1998 as a result
of an expansion of product development for its supply chain management software.
There can be no assurance that the Company will be able to anticipate, evaluate,
and adapt to changes in platforms and evolving technologies, or to do so in a
timely or cost effective manner.
Depreciation and Amortization
Depreciation and amortization only slightly changed on a pro form basis.
The Company expects depreciation during fiscal year 1998 to approximate the
fiscal 1997 level. The acquisition of CSTI will increase the amortization of
goodwill and developed software. The total amortization costs for fiscal 1998
are expected to be approximately $120,000.
General and Administrative
General and administrative expenses decreased $44,796 or 12% and $158,275
or 20% during the three and six pro forma months ended September 30, 1997 versus
the comparable periods in 1996 as a result of the consolidation of the Company's
headquarters in Bethesda, Maryland into its new facility in Concord,
Massachusetts and a decrease in administrative staff. A significant portion of
the Company's operating expenses are fixed, and planned expenditures in any
given quarter are based on sales and revenue forecasts. Accordingly, if products
are not completed and/or shipped on schedule and net sales do not meet the
Company's expectations in any given quarter, operating results and financial
condition could be adversely affected. Given the Company's recent acquisition
and sale of certain assets, as well as, the consolidation of operations in
November of 1996, the Company expects general and administrative expenses on a
pro forma basis to decrease in absolute dollars and as a percentage of sales in
fiscal 1998 versus 1997.
Sales and Marketing
Sales and marketing expense increased $96,348 or 88% and $114,125 or 53% on
a pro forma basis during the three and six months ended September 30, 1997
versus the comparable periods in 1996. This item includes personnel related
costs, as well as, those costs related to facilities, travel, trade shows,
advertising and promotions. Past CSTI expenditures on sales and marketing were
substantially below industry averages and the Company is committed to an
investment in sales and marketing efforts and alliances. This investment is
expected to generate an increase in future revenue. However, the benefits of
such expenditures are not expected to be realized during fiscal
Page 10 of 16
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CELERITY SOLUTIONS, INC.
Sales and Marketing, continued
1998. There can be no assurance that the Company will be able to realize the
benefits from this investment. The Company expects sales and marketing expenses
to increase in absolute dollars and as a percentage of sales during fiscal 1998.
Consolidation Charges
There are no consolidation charges in 1997, the $462,566 of consolidation
charges in the second quarter of 1996 relate to the closing and relocation of
the Company's offices in Bethesda MD into its offices at Concord MA.
Gain on Sale of Assets
The gain of $2,037,104 resulted from the sale of select multimedia assets
to Davidson for $2,509,759 in cash. The assets sold include machinery and
capital equipment utilized in art, animation and audio production in St.
Petersburg, Russia, and Concord, Mass. This gain is excluded from the pro forma
income statement.
Provision for Income Taxes
The provision for income taxes represents alternative minimum tax
liabilities and state income taxes on income earned. The Company expects an
effective tax rate of approximately 4% for fiscal year 1998. This rate differs
from the statutory rate due to anticipated partial recognition of $4,888,000 in
deferred tax assets which were fully reserved at March 1996.
Liquidity and Capital Resources
The Company's primary sources of liquidity are cash, cash equivalents, and
short-term investments. During the six months ended September 1997, cash, cash
equivalents, and investments increased $1,836,615 or 105% to $3,593,716. This
increase relates to $2,510,000 in proceeds from the sale of select multimedia
assets, less $ 110,000 in capital expenditures and $563,000 used to fund
operating activities. The Company will use its working capital to finance
ongoing operations and fund the continued expansion of its sales and marketing
resources. Management expects its existing cash and short-term investments, and
cash generated from operations will be sufficient to meet the Company's expected
liquidity and capital needs for fiscal 1998.
At September 30, 1997, the Company had outstanding Series A Warrants to
purchase 492,700 shares of Common Stock at $4.37 per share. These warrants
expire March 31, 1998, subject to extension by the Company. Pursuant to the
redemption provision in the Warrant Agreement, the Company has the option of
redeeming the warrants on an "all or nothing basis," and, given favorable market
conditions, may do so. Exercise of these warrants would generate approximately
$2,153,000 in cash.
The Company continues to consider investments in or acquisitions of
compatible businesses. However, there can be no assurance that the Company will
make investments in or enter into business combinations with other entities. In
the event that the Company engages in such transactions, it may require
additional financial resources.
Page 11 of 16
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CELERITY SOLUTIONS, INC.
Forward Looking Information
Except for the historical information contained in this Form 10-QSB, the
information set forth herein includes forward looking statements that are
dependent on certain risks and uncertainties. Important factors that could cause
the actual results to differ materially from the anticipated results include,
but are not limited to, the anticipated growth of certain market segments; the
positioning, release dates, and acceptance of Company products in the
marketplace; quarterly fluctuations and seasonality; political, social and
economic stability in Russia; the competitive environment and technological
change in the software industry; and dependence on distribution channels and key
personnel, all of which are difficult to predict and many of which are beyond
the control of the Company. Additional information on these and other factors
which could affect the Company's financial condition and/or results of
operations are included in the Company's March 31, 1997 Form 10-KSB filed with
the Securities and Exchange Commission.
The following is a description of certain risk factors that have not been
quantified by the Company in the past as they represent risks associated with
the change in focus of the Company towards the supply chain management segment
of the business software market. This list is not all inclusive and should be
considered in addition to factors included above and throughout Item 2(
Management Discussion and Analysis ).
Lack of Profitability: With the exception of the fiscal years ended March
31,1996 and 1997, the Company has not had a profitable year since its inception
in 1982. With the acquisition of CSTI on March 31, 1997, management repositioned
the Company for growth in an expanding industry. However, there can be no
assurance that the Company will be able to maintain any level of profitability.
Dependence on New Products and Rapid Technological Change: The Company's
success is largely dependent on its ability to develop new products and to
lengthen the life cycle of current products through upgrades and enhancements.
It must continually evaluate and adapt its products to emerging hardware
platforms and technologies. There can be no assurance that the Company will be
able to develop and market new products or product enhancements that respond to
technological change or evolving industry standards, that new products will be
released on schedule, or that released products will achieve any degree of
market acceptance.
Risk of Software Errors or Failures: The Company's software products may
contain undetected errors when first introduced or when new versions are
released. There can be no assurance that, despite testing of the Company's
products, errors will be detected in new products or subsequent releases,
resulting in the loss of or a delay in market acceptance which could have a
material adverse effect on the Company's business and its operating results and
financial condition.
Page 12 of 16
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CELERITY SOLUTIONS, INC.
Competition: The consumer and supply chain management software industries
are intensely competitive. Many competitors have substantially greater
financial, technical, marketing and distribution resources than the Company.
Competitors in the supply chain management software industry include Baan
Company N.V., Logility, Inc., I2, Inc., and the Manugistics Group, Inc. Existing
competitors may continue to broaden their product lines and potential
competitors, including larger computer or software manufacturers, may enter the
market or increase their focus and resources on products and product lines which
compete with the company's products. An increasing number of competitive
products may result in an inability to distribute or sell products, increased
development, marketing and distribution costs, and additional pricing pressures,
any of which could have a material adverse effect on the Company's operating
results.
Lack of Product Diversification: The Company's future results depend on
continued market acceptance of supply chain management software as well as the
Company's ability to adapt and modify such software to meet the evolving needs
of its customers. Any reduction in demand or increase in competition could have
a material adverse affect on the Company's operating results.
Dependence on Certain Distribution Channels: The Company's future success
in the supply chain management software industry depends upon the successful
expansion of the Company's marketing, sales, support and service organizations,
as well as its ability to establish alternative distribution channels, including
resellers, systems integrators and application software vendors. The Company has
formal and informal relationships with a number of third-party software and
hardware vendors and consulting and system integration firms. Such firms include
Hewlett Packard, Microsoft, Digital Equipment Corp., COGNOS, Business Forecast
Systems, and The Orion Group Software Engineers, Inc. There can be no assurance
that the Company will be able to expand its marketing, sales, support and
service organizations or develop additional distribution channels on a timely
basis.
Proprietary Intellectual Property Rights: The Company regards the software
it owns as proprietary and relies primarily on a combination of copyrights,
trademarks, trade secret laws, employee and third party nondisclosure agreements
and other methods to protect its proprietary intellectual property rights. The
Company has registered trademarks in the United States for certain of its
product names and has pending trademark applications for certain additional
product names. Most of the Company's products do not include any mechanisms to
prevent or inhibit unauthorized copying, nor does the Company rely on
shrink-wrap licenses which restrict copying and use of the products. The Company
is aware that unauthorized copying occurs within the software industry and that
if a significant amount of unauthorized copying of the Company's products were
to occur, the Company's business and operating results could be adversely
affected. As the number of software products increase and the functionality of
these products further overlaps, software developers may become increasingly
subject to infringement claims. Although there are currently no infringement
claims against the Company, there can be no assurance that third parties will
not assert infringement claims against the Company with respect to current or
future products, or that any such assertion will not require the Company to
enter into royalty arrangements or incur significant litigation costs.
Page 13 of 16
<PAGE>
CELERITY SOLUTIONS, INC.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not Applicable.
ITEM 2. CHANGES IN SECURITIES
Not Applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
Page 14 of 16
<PAGE>
CELERITY SOLUTIONS, INC.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Shareholders was held on August 21, 1997. The
following voting matters were approved at the meeting:
<TABLE>
<CAPTION>
Against/ Broker
For Withheld Abstain Non-Votes
--- -------- ------- ---------
<S> <C> <C> <C> <C>
1. Election of seven persons to the Board of
Directors to hold office until the next Annual
Meeting or until their successors have been
elected and qualified or their earlier resignation
or removal:
Robert Donaldson 4,605,851 35,687 -- --
Luda Kopeikina 4,606,613 34,925 -- --
Nico B.M. Letschert 4,606,613 34,925 -- --
Igor R. Razboff 4,606,613 34,925 -- --
Philip R. Redmond 4,606,613 34,925 -- --
Richard Santagati 4,606,613 34,925 -- --
Alan White 4,606,613 34,925 -- --
2. Ratification and approval of an Amendment to the
Company's Amended and Restated 1992 Non-Qualified
Stock Option Plan for Non-Employee Directors to
increase the number of authorized shares of the
Company's common stock issuable under the Director
plan from 300,000 to 600,000. 2,520,854 209,781 54,765 1,856,138
3. Ratification and approval of an Amendment to the
Company's Amended and Restated 1991 Non-Qualified
Employee Stock Option Plan increasing the number
of shares issuable under the Employee Plan from
1,500,000 to 3,000,000. 2,379,114 209.681 106,487 1,946,256
4. Ratification and approval of an Amendment to
Article 1 of the Company's Certificate of
Incorporation to change the Company's name to
"Celerity Solutions, Inc.". 4,598,059 23,985 19,494 -
</TABLE>
ITEM 5. OTHER INFORMATION
Not Applicable.
Page 15 of 16
<PAGE>
CELERITY SOLUTIONS, INC.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
3.1 Certificate of Incorporation, as amended (incorporated by reference
herein to the exhibit filed with the Company's Form 8K dated August
21, 1997 filed on September 5,1997).
4.5 Amended and Restated 1991 Non-Qualified Celerity Solutions, Inc.
Employee Stock Option Plan (incorporated by reference herein to the
exhibit filed with the Company's Form 8K dated August 21, 1997 filed
on September 5,1997).
4.6 Amended and Restated 1992 Non-Qualified Stock Option Plan for
Non-Employee Directors (incorporated by reference herein to the
exhibit filed with the Company's Form 8K dated August 21, 1997 filed
on September 5,1997).
11.1 Computation of Earnings Per Share
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
On September 5, 1997, the Company filed a Form 8-K disclosing the results
of votes brought before shareholders at its annual meeting which was held on
August 21,1997. Pursuant to that vote the Company also filed Exhibit 3.1 a
Certificate of Incorporation, as amended on August 21, 1997 to reflect the name
change of the Company from "Capitol Multimedia, Inc." to "Celerity Solutions,
Inc." ,as well as, Exhibit 4.5 the "Amended and Restated 1991 Non-Qualified
Celerity Solutions, Inc. Employee Stock Option Plan" and Exhibit 4.6 the
"Amended and Restated 1992 Non-Qualified Celerity Solutions, Inc. Stock Option
Plan for Non-Employee Directors".
SIGNATURE
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CELERITY SOLUTIONS, INC.
-----------------------------------
(Registrant)
Date: November 13, 1997 /s/ James P. Dore
-----------------------------------
James P. Dore
Controller (Principal Accounting
Officer)
Date: November 13, 1997 /s/ Edward Terino
-----------------------------------
Edward Terino
Chief Financial Officer &
Secretary/Treasurer
Page 16 of 16
CELERITY SOLUTIONS, INC.
EXHIBIT 11.1
CELERITY SOLUTIONS, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON SHARE
<TABLE>
<CAPTION>
(UNAUDITED)
Three Months Ended Six Months Ended
---------------------------------------------------------------------
September 30 September 30
---------------------------------------------------------------------
Six Months Ended June 30 1997 1996 1997 1996
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
PRIMARY EARNINGS PER SHARE
Net Income (Loss) $ (169,326) $(1,026,772) $1,504,386 $ (945,032)
Interest income from using the treasury
stock method 170,528
---------------------------------------------------------------------
Net Income $ (169,326) $(1,026,772) $1,674,914 $ (945,032)
=====================================================================
Weighted average number of share
outstanding during the three months 6,032,065 4,832,065 6,032,065 4,832,065
Incremental shares issuable pursuant
to outstanding options and warrants * * 927,328 *
---------------------------------------------------------------------
Weighted average number of shares used in
the computation of net income per share 6,032,065 4,832,065 6,959,393 4,832,065
=====================================================================
Primary earning per common share $ (.03) $ (.21) $ .24 $ (.20)
=====================================================================
</TABLE>
*Antidilutive
Fully diluted and primary net income per share for the six months ended
September 30,1997 were not materially different.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE CONSOLIDATED
BALANCE SHEET AT SEPTEMBER 30, 1997 AND CONSOLIDATED STATEMENTS OF
OPERATIONS FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1997 FOUND ON PAGES 3-5
OF THE COMPANY'S FORM 10QSB AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 3,344,576
<SECURITIES> 249,140
<RECEIVABLES> 1,102,380
<ALLOWANCES> 120,055
<INVENTORY> 0
<CURRENT-ASSETS> 4,962,976
<PP&E> 955,207
<DEPRECIATION> 581,908
<TOTAL-ASSETS> 7,429,152
<CURRENT-LIABILITIES> 845,623
<BONDS> 0
0
0
<COMMON> 685,715
<OTHER-SE> 16,747,202
<TOTAL-LIABILITY-AND-EQUITY> 7,429,152
<SALES> 2,057,968
<TOTAL-REVENUES> 4,231,110
<CGS> 1,103,082
<TOTAL-COSTS> 2,553,607
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 95,304
<INCOME-PRETAX> 1,582,199
<INCOME-TAX> 77,813
<INCOME-CONTINUING> 1,504,386
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,504,386
<EPS-PRIMARY> .24
<EPS-DILUTED> .24
</TABLE>
