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 December 31, 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 February 13, 1998
-------------- -----------------------
Common Stock, $.10 Par Value 8,017,798
Transitional Small Business Disclosure Format: Yes ___ No _X_
Exhibit Index on Page 15
Page 1 of 17
<PAGE>
CELERITY SOLUTIONS, INC.
DECEMBER 31, 1997
FORM 10-QSB
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets as of December 31, 1997
and March 31,1997 3
Condensed Consolidated Statement of Operations for the
three and nine months ended December 31, 1997 and 1996 5
Condensed Consolidated Statements of Cash Flows for the
nine months ended December 31, 1997 and 1996 6
Notes to Condensed Consolidated Financial Statements 7
ITEM 2. Management's Discussion and Analysis or Plan of
Operation 11
PART II OTHER INFORMATION
ITEM 1. Legal Proceedings 16
ITEM 2. Changes in Securities 16
ITEM 3. Defaults Upon Senior Securities 16
ITEM 4. Submission of Matters to a Vote of Security Holders 16
ITEM 5. Other Information 16
ITEM 6. Exhibits and Reports on Form 8-K 16
Signatures 17
Page 2 of 17
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Celerity Solutions, Inc.
Condensed Consolidated Balance Sheet
December 31 March 31
1997 1997
---------------------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 2,692,759 $ 760,065
Short-term investments 997,036
Accounts receivable, net 2,030,881 1,027,307
Notes and guaranteed royalties receivable 1,129,868 250,000
Prepaid expenses and other current assets 125,675 76,602
--------------------------
Total current assets 5,979,183 3,111,010
Property and equipment: 1,177,551 1,629,249
Less: accumulated depreciation and amortization (650,046) (970,874)
--------------------------
527,505 658,375
Capitalized Software, net 824,234 200,000
Notes and guaranteed royalties receivable 123,385 1,073,600
Goodwill, net 1,155,000 827,182
Other long-term assets 15,942 40,872
--------------------------
Total assets $ 8,625,249 $ 5,911,039
==========================
See accompanying notes.
Page 3 of 17
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Celerity Solutions, Inc.
Condensed Consolidated Balance Sheet (continued)
<TABLE>
<CAPTION>
December 31 March 31
1997 1997
--------------------------------------
(Unaudited)
<S> <C> <C>
Liabilities and shareholders' equity
Current liabilities:
Accounts payable and accrued liabilities $ 1,198,306 $ 430,768
Income taxes payable 381,635
Deferred income tax 172,262
Current portion of notes payable to related parties 1,072,604
Unearned revenue and other current liabilities 408,318 395,382
--------------------------------------
Total current liabilities 3,233,125 826,150
Notes payable to related parties 1,232,046 1,552,069
Deferred rent and income tax 125,155 83,328
--------------------------------------
Total liabilities 4,590,326 2,461,547
--------------------------------------
Shareholders' equity:
Common stock, $.10 par value 884,289 685,715
Additional paid-in capital 18,900,290 16,747,202
Accumulated deficit (13,699,312) (11,933,081)
--------------------------------------
6,085,267 5,499,836
Less treasury stock, at cost (2,050,344) (2,050,344)
--------------------------------------
Total shareholders' equity 4,034,923 3,449,492
--------------------------------------
Total liabilities and shareholders' equity $ 8,625,249 $ 5,911,039
======================================
</TABLE>
See accompanying notes.
Page 4 of 17
<PAGE>
Celerity Solutions, Inc.
Condensed Consolidated Statements of Operations
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31 December 31
1997 1996 1997 1996
------------------------------ ------------------------------
-----(Unaudited)----- -----(Unaudited)-----
<S> <C> <C> <C> <C>
Revenue:
Services $ 1,386,890 $ 517,500 $ 3,183,811 $ 1,241,409
Software licenses 108,889 10,255 369,936 626,056
Hardware and other 3,236 3,236
------------------------------ ------------------------------
Total revenue 1,499,015 527,755 3,556,983 1,867,465
Cost of sales
Services 799,102 1,902,184
Amortization of Capitalized Software 21,089 41,088
------------------------------ ------------------------------
Total cost of sales 820,191 1,943,272
------------------------------ ------------------------------
Gross Margin 678,824 527,755 1,613,711 1,867,465
Operating expenses:
Research and development 185,373 546,401 589,749 1,803,285
General and administrative 378,985 411,306 1,033,950 1,097,867
Sales and marketing 215,995 545,820
Consolidation charges 462,566
Amortization of goodwill 25,377 66,737
Purchased research and development 3,094,527 3,094,527
------------------------------ ------------------------------
Total operating expenses 3,900,257 957,707 5,330,783 3,363,718
------------------------------ ------------------------------
Operating loss (3,221,433) (429,952) (3,717,072) (1,496,253)
Other income (expense):
Interest and other income, net 55,148 82,710 191,185 218,379
Interest expense (52,830) (148,134)
Gain on sale of assets 2,037,104
------------------------------ ------------------------------
Loss before income taxes (3,219,115) (347,242) (1,636,917) (1,277,874)
Income tax (expense) benefit (51,500) 19,679 (129,312) 5,279
------------------------------ ------------------------------
Net loss $(3,270,615) $ (327,563) $(1,766,229) $(1,272,595)
============================== ==============================
Loss Per Common Share:
Net loss per share (.50) (.07) (.29) (.26)
============================== ==============================
Weighted average shares outstanding 6,545,599 4,832,065 6,203,243 4,832,065
============================== ==============================
Loss Per Share-Assuming Dilution:
Net loss per share (.50) (.07) (.29) (.26)
============================== ==============================
Weighted average shares outstanding 6,545,599 4,832,065 6,203,243 4,832,065
============================== ==============================
</TABLE>
See accompanying notes.
Page 5 of 17
<PAGE>
CELERITY SOLUTIONS, INC.
Celerity Solutions, Inc.
Condensed Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Nine Months Ended
December 31
1997 1996
------------------------------------
- - - - - (Unaudited)- - - - -
<S> <C> <C>
Operating Activities
Net (loss) income $(1,766,229) $(1,272,595)
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Depreciation of property and equipment 174,926 146,432
Amortization of goodwill and developed software 107,825
Write-off of purchased research and development 3,094,527
Gain on sale of assets (2,037,104)
Changes in assets and liabilities (net of effect from
disposition):
Accounts receivable (165,291) (509,549)
Prepaid expenses and other current assets 268,499 44,439
Short-term notes, royalties and other assets 250,000 500,000
Long-term notes, royalties, and other assets (162,364) (67,660)
Accounts payable and accrued liabilities 155,668 455,559
Income taxes payable 152,669
Unearned revenue and deferred rent 33,847 (55,158)
-----------------------------------
Net cash (used in) provided by operating activities 106,973 (758,532)
Investing Activities
Purchases of short-term investments (404,165)
Proceeds from sales of short-term investments 997,036 518,829
Purchase of Somerset Automation, Inc. net of cash acquired (1,579,214)
Proceeds from sale of assets 2,509,757
Capital expenditures (139,670) (201,563)
-----------------------------------
Net cash (used in) provided by investing activities 1,787,909 (86,899)
Financing Activities
Proceeds from sale of common stock 37,812
-----------------------------------
Net cash provided by financing activities 37,812 --
-----------------------------------
Net (decrease) increase in cash and cash equivalents 1,932,694 (845,431)
Cash and cash equivalents at beginning of period 760,065 1,961,393
-----------------------------------
Cash and cash equivalents at end of period $ 2,692,759 $ 1,115,962
===================================
</TABLE>
Non-cash financing activities:
The Company purchased all shares of Somerset Automation, Inc. for $5,557,918.
This transaction was partially financed by the issuance of 1,958,233 shares of
common stock and with seller notes payable totaling $ 747,907. See the
acquisition footnote for further information.
See accompanying notes.
Page 6 of 17
<PAGE>
CELERITY SOLUTIONS, INC.
NOTES TO CONDENSED 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 Celerity Solutions, Inc. (the
"Company"), as filed with the Securities and Exchange Commission under the
Company's former name, Capitol Multimedia, Inc. 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 December 31, 1996 Statement of Operations and Statement
of Cash Flows have been reclassified to conform to the December 31, 1997
presentation.
3. Segment Reporting
On June 1997, the Financial Accounting Standards Board issued Statement No. 131,
Disclosure about Segments of an Enterprise and Related Information, which must
be adopted for fiscal years beginning after December 15, 1997. This statement
need not be applied to interim financial statements in the initial year of its
application. Once this statement is adopted, comparative information for
previous years is required to be restated to comply with FAS-131's reporting
requirements. The Company has not yet adopted this statement. When adopted, it
will affect only the presentation of financial information and will not impact
the financial results.
4. Subsequent Events
In October 1997, the Accounting Standards Executive Committee issued its
Statement of Position (SOP) 97-2 providing guidance on applying generally
accepted accounting principles in recognizing revenue on software transactions.
This SOP is effective for transactions entered into in fiscal years beginning
after December 15, 1997. The Company has not yet adopted this SOP and has not
determined what effect it will have on the Company's results.
Page 7 of 17
<PAGE>
CELERITY SOLUTIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
5. Loss Per Share
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, Earnings per Share, which must be adopted for periods ending after December
5, 1997 including interim periods. The Company has adopted FASB No. 128 and has
changed its method of computing earnings per share and has restated prior
periods. Under the new requirements for calculating primary earnings per share,
the dilutive effect of stock options will be excluded. This statement also
prohibits the inclusion of any potential common shares from any computation when
a loss from continuing operations exists. The effect would be antidilutive. The
Company is reporting losses from operations and thus has not added potential
common shares to the weighted average shares outstanding.
The following table sets forth the computation of basic and diluted loss per
share:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
-------------------------------------------------------------
December 31 December 31
-------------------------------------------------------------
1997 1996 1997 1996
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Numerator:
Net loss $(3,270,615) $(327,563) $(1,766,229) $(1,272,595)
-------------------------------------------------------------
Numerator for loss per common share and loss
per share-assuming dilution $(3,270,615) $(327,563) $(1,766,229) $(1,272,595)
=============================================================
Denominator:
Denominator for loss per common share-Weighted
average shares outstanding 6,545,599 4,832,065 6,203,243 4,832,065
Effect of Dilutive securities: * * * *
-------------------------------------------------------------
Denominator for diluted loss per share-
Adjusted weighted average shares 6,545,599 4,832,065 6,203,243 4,832,065
=============================================================
Loss per common share and loss per common
share-assuming dilution
$(.50) $(.07) $(.29) $(.26)
=============================================================
</TABLE>
*Potential common shares are not included because they would be antidilutive.
Had the numerator been a profit the potential common shares would have increased
the weighted average shares outstanding by 348,282 and 307,465 shares as of the
three and nine months ended December 31, 1997. In addition, there were options
to purchase 663,211 shares at exercise prices between $1.6689 and $4.660 per
share outstanding at December 31, 1997 that were not included in the potential
common share computations because their exercise prices were greater than the
average market price of the common shares. There were also warrants to purchase
599,621 shares at $3.57 and 80,000 shares at $8.25 which were outstanding at
December 31, 1997, but not included in the potential common share computations
because their exercise prices were greater than the average market price of
common shares. These would have been antidilutive, even if a profit had been
reported in the numerator.
Pro forma earnings per share do not include potential common shares for the same
reasons as stated above for the actual results. The weighted average shares
outstanding on the pro forma's assume that shares issued for the referenced
acquisitions were outstanding for the entire periods.
Page 8 of 17
<PAGE>
CELERITY SOLUTIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
6. Acquisition of Client Server Technologies, Inc. (CSTI), sale of select
multimedia assets, and acquisition of Somerset Automation, Inc. (SAI)
On March 31, 1997, the Company acquired all of the outstanding stock of CSTI for
stock, debt securities and cash valued at $3,853,060. The purchase price was
composed of 1,200,000 unregistered shares of the Company's common stock valued
at of $1,050,000, non-interest bearing convertible long-term notes to sellers
totaling $1,945,000 discounted to a value of $1,552,069, and cash payments
totaling $1,250,991. Holders of the debt securities issued in the transaction
have the right to convert $945,000 of 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 purchased research and
development which was written off at March 31, 1997.
On April 16, 1997, the Company sold certain of its multimedia assets to Davidson
& Associates (Davidson) a division of Cendant, Inc. 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 December 8, 1997, the Company acquired all of the outstanding stock of SAI
for stock, debt securities and cash valued at $5,557,918. The purchase price was
composed of 1,958,233 unregistered shares of the Company's common stock valued
at $2,313,848, long-term notes, with a stated interest rate of 7.5%, totaling
$747,907, and cash payments totaling $2,496,163. The cash portion of the
purchase price was netted on the Condensed Consolidated Statement of Cash Flows
against $916,949 of cash held by SAI. SAI was merged into Somerset Solutions,
Inc. (Somerset), a wholly owned subsidiary of the Company, at which time SAI's
corporate existence terminated. The transaction was accounted for under the
purchase method of business combinations. As a result of the acquisition,
$394,553 of goodwill was recorded which will be amortized on a straight line
basis over 7 years, $665,323 of capitalized software was recorded and will be
amortized on a straight line basis over 5 years, and $3,094,527 of purchased
research and development was written off at December 8, 1997.
Page 9 of 17
<PAGE>
CELERITY SOLUTIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
Supplemental pro forma results of operations for the three and nine months ended
December 31, 1997 and 1996, assuming the above transactions were consummated
prior to April 1, 1996, are presented below.
<TABLE>
<CAPTION>
Pro Forma Three Months Pro Forma Nine Months
Ended December 31 Ended December 31
1997 1996 1997 1996
------------------------------ ------------------------------
-----(Unaudited)----- -----(Unaudited)-----
<S> <C> <C> <C> <C>
Revenue:
Services $ 2,212,859 $ 1,480,536 $ 5,926,212 $ 4,408,085
Software licenses 228,889 240,467 865,536 1,511,651
Hardware and other 21,872 46,248 111,660 338,816
------------------------------ ------------------------------
Total revenue 2,463,620 1,767,251 6,903,408 6,258,552
Cost of sales
Services 1,280,848 904,102 3,337,332 2,947,158
Amortization of Capitalized Software 43,267 43,267 129,801 129,801
------------------------------ ------------------------------
Total cost of sales 1,324,115 947,369 3,467,133 3,076,959
------------------------------ ------------------------------
Gross Margin 1,139,505 819,882 3,436,275 3,181,593
Operating expenses:
Research and development 191,002 194,044 600,567 597,245
General and administrative 674,952 663,598 1,939,082 1,727,753
Sales and marketing 268,687 261,971 745,186 682,541
Consolidation charges 462,566
Amortization of goodwill 34,771 34,771 104,312 104,313
------------------------------ ------------------------------
Total operating expenses 1,169,412 1,154,384 3,389,147 3,574,418
------------------------------ ------------------------------
Operating income (loss) (29,907) (334,502) 47,128 (392,825)
Other income (expense):
Interest and other income, net 51,861 93,523 143,528 248,052
Interest expense (62,231) (61,685) (187,789) (185,006)
------------------------------ ------------------------------
Income (loss) before income taxes (40,277) (302,664) 2,867 (329,779)
Income tax (expense) benefit 15,156 (4,000) (26,021)
============================== ==============================
Net loss $ (40,277) $ (287,508) $ (1,133) $ (355,800)
============================== ==============================
Loss Per Common Share:
Net loss per share -- (.04) -- (.05)
============================== ==============================
Weighted average shares outstanding 7,992,988 7,990,298 7,991,195 7,990,298
============================== ==============================
Loss Per Share-Assuming Dilution:
Net loss per share -- (.04) -- (.05)
============================== ==============================
Weighted average shares outstanding 7,992,988 7,990,298 7,991,195 7,990,298
============================== ==============================
</TABLE>
Page 10 of 17
<PAGE>
CELERITY SOLUTIONS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Business Developments
The Company acquired CSTI on March 31, 1997 in a transaction accounted for
under the purchase method of accounting. This acquisition provided the Company
an entry into the supply chain management (SCM) sector of the business software
market. SCM encompasses the planning and control of material and resources from
customer order entry through warehousing and logistics to customer delivery.
During the nine months ended December 31, 1997, CSTI signed license and service
arrangements with Teleport Communications Group Inc. (TCG), Nortel
Communications (Nortel), Methanex Methanol Company, a subsidiary of Methanex
Corporation, and several others valued at approximately two million five hundred
thousand dollars ($2,500,000).
In April 1997, the Company sold certain of its multimedia assets to
Davidson, a division of Cendant, 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 has focused on the
business software market and has no plans to develop new multimedia products in
the foreseeable future.
In August 1997, the Company established Paragon, a limited liability
company in St. Petersburg Russia as a wholly owned subsidiary. Paragon develops
software for the Company. Paragon has retained the services of 10 technical
personnel some of whom were employed by the Company's subsidiary AMI, which was
sold in April of 1997.
On December 8, 1997, the Company acquired all of the outstanding stock of
Somerset Automation, Inc. (SAI), a privately held warehouse management software
company based in Irvine, California by means of a merger between SAI and
Somerset Solutions, Inc. (Somerset) a wholly owned subsidiary of the Company.
SAI is a profitable technology leader in the warehouse management software
market. SAI had approximately $4.5 million in annual revenues in 1997. The
acquisition of Somerset fills a strategic product need for the Company.
Somerset's warehousing product, combined with the Company's existing supply
chain management product, creates a more powerful product line which enables
control of inventory and resources not only between locations in the supply
chain but through warehouses as well. This new capability positions the Company
to provide integrated warehouse and supply chain management software for the
middle market. Somerset's customers include Corporate Express, Wesley Jessen,
Pleasant Company, Bugle Boy Industries, and Columbia Sportswear. Somerset's
warehouse management software, WMS 4.0, is client-server based, highly flexible,
user configurable, and supports single and multiple facility enterprises.
Modules include Inventory Control, Inventory Management, Inbound Processing, and
Workload Management.
Presentation
Since the Company's April 1997 sale of select multimedia assets to
Davidson, the March 1997 acquisition of CSTI, and the December 1997 acquisition
of SAI, the Company has focused principally on the business software market.
Existing multimedia software titles continue to be sold through its distribution
channels that were established prior to the divestiture. However multimedia
revenue represents a small fraction of the Company's revenues. Accordingly, the
discussion and analysis of the Company's results of operations compares pro
forma results for the three and nine months ended December 31, 1997 to pro forma
results for the three and nine months ended December 31, 1996. This pro forma
presentation, which is included in the notes to condensed consolidated financial
statements, assumes that the transactions had occurred on March 31, 1996. The
Company believes such comparison provides a more meaningful analysis of current
and prior fiscal year results.
Page 11 of 17
<PAGE>
CELERITY SOLUTIONS, INC.
Pro Forma Net Sales
The composition of pro forma net sales for the three and nine months ended
December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31 December 31
1997 1996 % Change 1997 1996 % Change
---- ---- -------- ---- ---- --------
<S> <C> <C> <C> <C> <C> <C>
Business Software
Supply Chain Management $1,154,106 $ 879,620 31.2% $3,060,477 $2,791,225 9.6%
Warehouse Management 1,265,139 877,376 44.2% 3,646,960 2,841,271 28.4%
Multimedia Software 44,375 10,255 332.7% 195,971 626,056 (68.7)%
---------------------------------------------------------------------------------
Total net sales $2,463,620 $1,767,251 39.4% $6,903,408 $6,258,552 10.3%
=================================================================================
</TABLE>
Revenues from Supply Chain Management increased $274,486 or 31.2% and
$269,252 or 9.6% on a pro forma basis for the three and nine months ended
December 31, 1997 versus the same 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 Company continues to expand all phases of sales and
marketing in order to generate long-term business software sales growth. The
Company expects that actual and pro forma revenues in fiscal 1998 will increase
above the actual and pro forma revenues reported for fiscal 1997, however there
can be no assurances as to the extent of such increase or if revenues will
increase at all.
Revenues from Warehouse Management (WMS) increased $387,763 or 44.2% and
$805,689 or 28.4% on a pro forma basis for the three and nine months ended
December 31, 1997 versus the same 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 Company continues to expand all phases of sales and
marketing in order to generate long-term business software sales growth. The
Company expects that actual and pro forma revenues in fiscal 1998 will increase
above the actual and pro forma revenues reported for fiscal 1997, however there
can be no assurances as to the extent of such increase or if revenues will
increase at all.
Consumer software sales and royalties increased $34,120 or 332.7% and
decreased $ 430,085 or 68.7% on a pro forma basis for the three and nine months
ended December 31, 1997 versus the same periods in 1996. During the nine months
ended December 31, 1996 the Company recognized five hundred and twenty thousand
dollars ($520,000) in guaranteed prepaid royalty revenue from the release of
three foreign title releases and one domestic title release. The Company has
focused on the business software market during fiscal 1998 and will continue to
do so. The Company has no plans to develop new multimedia products in the
foreseeable future. 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.
Page 12 of 17
<PAGE>
CELERITY SOLUTIONS, INC.
Pro Forma Net Sales, continued
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 and warehouse management solutions
require 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.
Cost of Sales
Cost of services are incurred in connection with the sale of supply chain
and warehouse management software. Cost of services consists of costs primarily
associated with consulting and implementation services that are sold as part of
a total supply chain and warehouse management solution, and costs associated
with providing support to customers. These costs increased $376,746 or 41.67%
and $390,174 or 13.2% on a pro forma basis during the three and nine months
ended December 31, 1997 versus 1996. Cost of services as a percent of revenue
from services increased only 1% for the three and nine months ended December
1997 versus 1996. The 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 on a pro forma, as well as, actual basis to increase in
absolute dollars, but not as a percent of sales during fiscal 1998 and 1999.
Amortization of capitalized software had no change during the three and
nine months ended December 31, 1997. Software capitalization resulted from the
acquisitions of CSTI and SAI, and thus was unchanged because the pro forma
financials assume that these transactions occurred prior to the beginning of the
periods presented. On an actual basis these expenses will increase in fiscal
1998 over fiscal 1997 and will also increase in fiscal 1999 over fiscal 1998.
The actual capitalized software amortization costs for fiscal 1998 are expected
to be approximately $84,000.
Research and Development
Research and development (R&D) expense decreased $3,042 or 1.6% and
increased $3,322 or less than 1%on a pro forma basis during the three and nine
months ended December 31, 1997 versus the same periods in 1996. R&D costs as a
percentage of total business software sales were 9% and 10% on a pro forma basis
for the nine-month ended December 31, 1997 and 1996 respectively. The Company
expects R&D costs to increase in absolute dollars during fiscal year 1998 and
1999 as a result of an expansion of product development and integration of its
supply chain and warehouse management software packages. The Company expects R&D
as a percent of sales to be consistent with prior years, reflecting utilization
of lower development costs provided by Paragon. 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.
Page 13 of 17
<PAGE>
CELERITY SOLUTIONS, INC.
Depreciation and Amortization
Depreciation and amortization only slightly changed on a pro form basis
during the three and nine months ended December 31, 1997 versus the same periods
in 1996. The Company expects depreciation during fiscal year 1998 to approximate
the fiscal 1997 level. On the actual financial statements the acquisition of
CSTI and Somerset Automation will increase depreciation and the amortization of
goodwill in fiscal 1999. The actual goodwill amortization costs for fiscal 1998
are expected to be approximately $101,500.
General and Administrative
General and administrative expenses increased $11,354 or 1.7% and $211,329
or 12.2% on a pro forma basis during the three and nine months ended December
31, 1997 versus the same periods in 1996. The increases came from administrative
position increases at Somerset necessitated by growth and was partially offset
by a decrease from the consolidation of the Company's headquarters in Bethesda,
Maryland into its new facility in Concord, Massachusetts and a decrease in
administrative staff. General and administrative expenses as a percent of sales
are up less than 1% for the nine months ended December 31, 1997 versus 1996 on a
pro forma basis. 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 acquisitions, the sale of certain assets, and the
consolidation of operations in November of 1996, the Company expects general and
administrative expenses on a pro forma, as well as, actual basis to increase in
absolute dollars, but to decrease as a percent of sales in fiscal 1998 versus
1997. The Company expects similar increases in absolute dollars with decreases
as a percent of sales during fiscal 1999 over fiscal 1998.
Sales and Marketing
Sales and marketing expense increased $6,716 or 2.6% and $62,645 or 9.2% on
a pro forma basis during the three and nine months ended December 31, 1997
versus the same periods in 1996. This item includes personnel related costs, as
well as, those costs related to facilities, travel, trade shows, advertising and
promotions. Somerset's sales and marketing effort was uniform over the pro forma
periods but is expected to increase for the remainder of fiscal 1998. CSTI
expenditures on sales and marketing were substantially below industry averages.
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 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 on a pro forma, as well as, actual basis to increase in
absolute dollars and as a percent of sales during fiscal 1998 and 1999.
Consolidation Charges
There are no consolidation charges in fiscal 1998, 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 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.
Page 14 of 17
<PAGE>
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 7% 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 and 1997.
Liquidity and Capital Resources
The Company's primary sources of liquidity are cash, cash equivalents, and
short-term investments. During the nine months ended December 1997, cash, cash
equivalents, and investments increased $ 935,658 or 34.7% to $2,692,759. This
increase relates to $2,510,000 in proceeds from the sale of select multimedia
assets and cash provided by operating activities of $107,000, less $1,579,214
for the purchase of Somerset Automation ($2,496,163 net of cash acquired of
$916,949), and $139,000 in capital expenditures. 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 December 31, 1997, the Company had outstanding Series A Warrants to
purchase 599,621 shares of Common Stock at $3.57 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
$2,141,000 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.
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; 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, and the 8-K filed by
the Company on February 11, 1998 with the Securities and Exchange Commission.
Page 15 of 17
<PAGE>
CELERITY SOLUTIONS, INC.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
No Litigation.
ITEM 2. CHANGES IN SECURITIES
Not Applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
ITEM 5. OTHER INFORMATION
February 11, 1998 the Company filed a Form 8-K updating risk factors affecting
the Company.
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 filed with the
Securities and Exchange Commission on September 5, 1997).
3.2 Bylaws of the Company (incorporated by reference herein to the exhibit
filed with the Company's Form S-18 (or a Post-Effective Amendment thereto,
Registration No. 33-45725-A).
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
On December 23, 1997, the Company filed a Form 8-K disclosing the
acquisition of Somerset Automation, Inc.
Page 16 of 17
<PAGE>
CELERITY SOLUTIONS, INC.
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: February 12, 1998 /s/ James P. Dore
------------------
James P. Dore
Controller (Principal Accounting
Officer)
Date: February 12, 1998 /s/ Edward Terino
------------------
Edward Terino
Chief Financial Officer &
Secretary / Treasurer
Page 17 of 17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE CONDENSED
CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 1997 AND THE CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS FOR THE NINE MONTHS ENDED DECEMBER 31, 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> 9-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> DEC-30-1997
<CASH> 2,692,759
<SECURITIES> 0
<RECEIVABLES> 2,085,692
<ALLOWANCES> 54,811
<INVENTORY> 0
<CURRENT-ASSETS> 5,979,183
<PP&E> 1,177,551
<DEPRECIATION> 650,046
<TOTAL-ASSETS> 8,625,249
<CURRENT-LIABILITIES> 3,233,125
<BONDS> 0
0
0
<COMMON> 884,289
<OTHER-SE> 18,900,290
<TOTAL-LIABILITY-AND-EQUITY> 8,625,249
<SALES> 3,556,983
<TOTAL-REVENUES> 5,785,272
<CGS> 1,943,272
<TOTAL-COSTS> 7,274,055
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 148,134
<INCOME-PRETAX> (1,636,917)
<INCOME-TAX> 129,312
<INCOME-CONTINUING> (1,766,229)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,766,229)
<EPS-PRIMARY> (.29)
<EPS-DILUTED> (.29)
</TABLE>
