U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
/ X / ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 1998
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _______
COMMISSION FILE NUMBER: 0-20102
CELERITY SOLUTIONS, INC.
(Name of small business issuer in its charter)
DELAWARE 52-1283993
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
200 Baker Avenue, Suite 300
Concord, MA 01742
(Address of principal executive offices)
Issuer's telephone number: (978) 287-5888
Securities registered under Section 12(b) of the Exchange Act: NONE
Securities registered under Section
12(g) of the Exchange Act:
COMMON STOCK $.10 PAR VALUE
(Title of Class)
REDEEMABLE SERIES A WARRANTS
(Title of Class)
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 [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B in this form and no disclosure will be contained, to the best of
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]
Issuer's Revenues for the Fiscal Year Ended March 31, 1998: $ 6,178,313
The aggregate market value of the voting stock held by non-affiliates, computed
using the sales price of such stock, as of May 31, 1998 was $ 19,547,391
As of May 31, 1998, the number of shares of Common Stock outstanding 8,017,798.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Definitive Proxy Statement for its 1998 Annual
Meeting of Shareholders to be held August 25, 1998 are incorporated by reference
into Part III hereof. The Definitive Proxy Statement will be filed with the
Commission within 120 days of the registrant's fiscal year ended March 31, 1998.
Transitional Small Business Disclosure Format Yes [ ] No [ X ]
Exhibit Index Located on Page 46 Page 1 of 48
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CELERITY SOLUTIONS, INC.
MARCH 31, 1998
FORM 10-KSB
TABLE OF CONTENTS
PART I
ITEM 1. DESCRIPTION OF BUSINESS
ITEM 2. DESCRIPTION OF PROPERTY
ITEM 3. LEGAL PROCEEDINGS
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
ITEM 7. CONSOLIDATED FINANCIAL STATEMENTS
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS
ITEM 10. EXECUTIVE COMPENSATION
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
INDEX OF EXHIBITS
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Celerity Solutions, Inc. ("Celerity" or the "Company") has been in existence
since 1982, going public in 1992, as Capitol Multimedia, Inc. In 1997, the
Company changed its name to Celerity Solutions, Inc., and transformed itself
from a multimedia publisher to a supply chain software provider. The Company
develops, markets and supports client-server and internet-enabled business
software applications. The Company has no plans to develop new multimedia
products in the foreseeable future. Supply chain management encompasses the
planning and control of material and resources from customer order entry through
warehousing and logistics to customer delivery. The Company's strategy is to
provide state-of-the-art, real-time planning and management capabilities that
improve customer cycle time from order receipt to product delivery, and reduce
inventory costs.
The Company entered into the supply chain sector of the business software market
in March 1997 through the acquisition of Client Server Technologies Inc. (CSTI),
a developer and integrator of supply chain management software. 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,
and has retained the services of 10 technical personnel, some of whom were
employed by the Company's former subsidiary AMI, which was sold in April 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 and merged it into a wholly owned
subsidiary, Somerset Solutions, Inc. (Somerset). Somerset is a technology leader
in the warehouse management software market. 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.
The Company's products are used by more than 100 organizations in the U.S. and
Europe. These companies represent a variety of industries, including
telecommunications, manufacturing, utilities, and retail. Customers include
Corporate Express, Methanex Methanol, Nortel, Distribution Dynamics, Universal
Furniture, Image Entertainment, Wesley Jessen, Alcatel, TCG, United Liquors, and
Honeywell.
HISTORY
The Company has been in existence since 1982, and went public in 1992, as
Capitol Multimedia, Inc. Since going public, the Company has earned an
international reputation as a top quality multimedia developer with critically
acclaimed original products. However, the multimedia industry experienced
significant consolidation commencing in 1996 as product demand dropped in the
face of significant over capacity and limited means of product distribution. The
Company determined that it was unable to successfully compete in this
environment. In the fall of 1996, the Company hired a new management team and
after a comprehensive assessment of the business, management decided to position
the multimedia business for sale and to pursue opportunities in the supply chain
management business software market.
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HISTORY, CONTINUED
Acquisition of CSTI. On March 31, 1997, the Company acquired CSTI for
approximately $3.9 million through the issuance of 1,200,000 shares of common
stock, payments of $1.25 million in cash and issuance of non-interest bearing,
convertible, long-term notes totaling $1.9 million to sellers and discounted to
a value of $1.55 million. The transaction was accounted for under the purchase
method of business combinations. The acquisition provided the Company an entry
into the supply chain management sector of the business software market. CSTI
employs approximately 35 people with offices in Dedham, Massachusetts; Denver,
Colorado; and Los Angeles, California. Please refer to Item 6, Management
Discussion and Analysis for further discussion on the acquisition.
Sale of selected multimedia assets. On April 16, 1997, the Company sold selected
multimedia assets, including assets relating to its art, animation and audio
production capabilities in St. Petersburg, Russia and Concord, Massachusetts, to
Davidson & Associates, Inc. (Davidson), a division of Cendant, Inc., for
approximately $2.5 million in cash. The gain from this transaction was
approximately $2.0 million. 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. Please refer to Item 6, Management Discussion and
Analysis for further discussion of this transaction. As a result of this sale,
the Company no longer develops its own multimedia software titles for the
consumer market or provides development services for others, but will continue
to sell existing titles through its current distribution channels. However,
multimedia revenue represents a small fraction of the Company's revenue that is
not material to the business.
Acquisition of SAI. On December 8, 1997, the Company acquired all of the
outstanding stock of SAI, a privately held warehouse management software company
based in Irvine, California by means of a merger between SAI and Somerset a
wholly owned subsidiary of the Company. Somerset is a technology leader in the
warehouse management software market. SAI had approximately $4.5 million in
annual revenue in 1997. The acquisition of SAI filled a strategic product need
for the Company. Somerset's warehousing product, combined with the Company's
existing supply chain management products, 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.
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INDUSTRY BACKGROUND
According to Advanced Manufacturing Research (AMR) the Supply Chain Management
Software Market in 1996 was $1 billion, and is poised for rapid and substantial
growth through 2001. Long-term growth is expected to average over 35% per year
through 2001, and software license fees are expected to grow by a factor of six
times service revenues from $419 million in 1996 to $2.7 billion in 2001. The
market is expected to grow to $6.5 billion by 2001. There are three primary
segments in this market: Supply Chain Planning and Execution; Warehouse
Management Systems, and Transportation Management Systems. Based on license
fees, these three segments represent 65%, 20%, and 15% of the total market,
respectively.
AMR identifies four drivers of growth over the next five years, including:
o The ongoing pressure by retailers and other manufacturers to push inventory
back onto the suppliers, combined with the increasing complexity and
tightening of scheduling of orders;
o The competitive advantage gained by early adopters of supply chain
management (SCM) process reengineering imposing a corresponding competitive
necessity on other corporations;
o The increasingly broad selection and availability of packaged SCM
applications, as well as the movement toward integrated end-to-end SCM
suites by vendors lowering the cost of entry and accelerating the pace of
adoption; and
o The push by companies for greater efficiency in the use of their assets,
including inventory and capital equipment.
PRODUCTS
The Company offers supply chain management software solutions and integration
services for distribution, planning, warehousing and financial functions within
a business to increase productivity, reduce inventory and improve planning and
control. Products operate in the most popular technology platforms, Windows NT
and UNIX and popular databases, ORACLE and Sybase. Products are built utilizing
a client-server architecture. The Company's products are grouped into three
areas: planning, operations and finance, and warehousing. Special modules by
area follow:
- --------------------------------------------------------------------------------
Operations/
Planning Financials Warehousing
- --------------------------------------------------------------------------------
o Demand Planning o Sales Order o Inventory Control
o Supply Chain Planning Management o Inventory Maintenance
o Transportation Planning o Inventory Control o Inventory Management
o Purchase Order o Inbound Processing
Management o Outbound Processing
o Accounts Receivable o Workload Management
o Accounts Payable
o Materials Requisition
Management
o Available to Promise
o Sales Analysis
- --------------------------------------------------------------------------------
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PRODUCTS,CONTINUED
o Planning - the planning modules offer true real time continuous planning.
The Supply Chain Planner (Planner) is based on patented methodology. The
Planner provides a real-time view of the entire supply chain, optimizes
supply in response to demand, coordinates all planning and execution
activities, and allows the user to react to user defined exceptions. These
modules allow regional and enterprise-wide control, are scalable and are
fully integrated with the Company's other modules.
o Operations/Financials - The sales order management module allows order
processing in a variety of ways that are specific to customers. Proprietary
tools, such as Order Type Configurator, allow customization without custom
coding. Inventory Planning and Control provides support for
multi-warehouse, multi-location operations and helps customers to identify
and execute cost reduction initiatives across the supply chain. Purchase
Order Management allows customers to focus on vendor management and price
negotiations rather than administrative processing by providing
consolidated information. Proprietary tools allow customization with
limited coding requirements. Financial Management allows customers to
process accounts receivable, accounts payable and general ledger activity
relative to their business transactions. Financial Management modules are
fully integrated with the rest of the products and reflect changes made
throughout the supply chain in an effective and accurate manner.
o Warehousing - Key features include increased inventory management
capabilities, running multiple business divisions and warehouses from one
version of the warehousing software on a single server, and maximized
worker productivity through directed, "task-based" distribution operations.
Other features include user-friendly querying and reporting tools to
schedule, manage, and report on distribution resources, orders, and
inventory; Radio Frequency (RF) as well as paper-based operations;
increased flexibility and productivity through paperless, real-time RF task
dispatching.;integrated shipping and manifesting; real-time integration
with automated material handling system and maximum inventory visibility
for customer service and purchasing through instantaneous updating with
business host systems.
The Planning and Operations/Financial modules support different currencies,
positioning them for today's global environment. During the fiscal year ended
March 1998, the sales prices of the Company's software license fees generally
ranged from $100,000 to approximately $500,000. The price for the individual
product package is determined based on a number of factors, including the number
of users, the number of sites in the customer's business model and the
complexity of the customer's operation.
PRODUCT DIFFERENTIATORS
In order to effectively reduce cycle time and inventory investment in the whole
supply chain, companies must have the ability to:
o Plan inventory purchase decisions based on timely, accurate information
about demand, existing supply, production capacity and lead times to
delivery;
o Execute purchases, deliveries, customer orders, shipments and collections
in a timely, efficient manner; and
o Manage and control inventory and labor resources throughout the supply
chain.
The Company believes its products provide the ability for customers to achieve
improved cycle time and reduced inventory investment and are differentiated from
its competitors products based on the following capabilities:
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PRODUCT DIFFERENTIATORS, CONTINUED
Supply Chain Planning. The Company's products provide a real-time view of the
entire supply chain based on a patented continuous planning model methodology.
This allows customers to match demand with supply more accurately and on a
timely basis, thus reducing the amount of inventory needed and the lead time for
delivery of inventory to fulfill customer orders.
Sales Order Management. The Company's products provide for unique order type
configuration without programming. This capability enables definition and
handling of an unlimited number of different order types and the flow of orders
through the enterprise, which is critical to many businesses.
Warehouse Management System. The Company's products provide real time
information on activity throughout the warehouse infrastructure. This allows for
constant adjustment to labor and workload resources, enables the optimization of
warehouse productivity and reduces the cycle time for customer shipments. The
software enables customers to realize added value through functionality that
provides advanced inventory optimization strategies.
Accurate Information about the Supply Chain. The Company's products provide the
ability to propagate changes at all levels in the supply chain immediately after
a change is made. This allows managers to have accurate integrated information
that facilitates fast strategic and tactical decisionmaking.
Available to Promise. The Company's products provide the ability to accurately
promise order delivery for a certain date that is enabled by the real time
nature of our product.
Ease of Installation. The Company's products provide full product integration
that utilizes sophisticated tools to simplify the installation and allow
customization in a fast and efficient manner.
Scalability. The Company's products allow customers to divide their operations
into domains for the purposes of planning. This capability allows customers to
plan effectively for international and geographically dispersed organizations
and to add or delete domains as the business grows.
COMPANY STRATEGY
The Company's strategy is to become a significant provider of supply chain
management software by aggressively pursuing the following strategies.
Focus on the middle market.
The Company is currently focused on the middle market of manufacturers and
distributors with revenues ranging from $200 million to $1 Billion.
The Company believes the factors which will enable a company to successfully
compete in the middle market are:
o Providing a single solution
o Price sensitivity
o Simplicity of integration
o Fast time to system benefit realization
o Low cost implementation
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COMPANY STRATEGY, CONTINUED
By offering a broad suite of planning, operations, finance and warehousing
products working together, the Company is able to provide a single solution that
is easily integrated. The Company's proprietary implementation approach and
tools allow customers to reduce implementation timetables and costs, and realize
benefits faster. The Company has positioned its product, by incorporating a
large number of features required by the middle market into its standard
software packages, to address the funding constraints of its customers and to
provide a low implementation cost alternative to the middle market.
The Company also believes that "packaging" the product is critical to continued
license sales and revenue growth. Such packaging efforts include tools that
allow customers to configure the Company's product to specific needs as well as
tools that allow ease of implementation and integration. One focus of the
Company's development effort during fiscal 1999 is the packaging of several
modules in its product suite.
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.
Growth strategies.
Acquire Complementary Businesses. The Company will seek to expand through the
acquisition of other companies in the market. The Company intends to fill
functional gaps in its product line by integrating the capabilities of the
acquired companies. Because the company has already acquired and integrated two
businesses, and the management team has significant acquisition and integration
experience, the Company believes that this strategy can be executed
successfully.
Invest in Sales and Marketing. The Company intends to continue to expand its
sales and marketing efforts. The Company believes that these investments are
necessary and critical to capitalize on the growth in the supply chain
management software market.
Build Alliances and Expand Network of Independent Distributors. The Company's
product is designed in a modular way and allows easy integration with business
software. The Company intends to pursue strategic alliances with Material
Requirements Planning (MRP) and Enterprise Resource Planning (ERP) vendors in
the areas where the Company's modules provide additional flexibility and
functionality to the existing MRP and ERP vendors. In addition, the Company
intends to establish joint marketing and other relationships with complementary
business application software vendors, systems consulting and integration
vendors. The Company is also planning to utilize the multi-currency capabilities
of its Planning and Operational/Financial modules for international sales.
Develop Advanced Product Functionality. The Company sees many opportunities to
develop advanced product functionality. With the increasing acceptance of the
use of the Internet in business, the Company intends to develop appropriate
functionality for this rapidly evolving market.
Utilize Cost-effective Software Development Capability. The Company intends to
fully utilize its highly sophisticated cost-effective software development
capability in St. Petersburg, Russia. By increasing resources, but decreasing
dollars spent in previous periods
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COMPANY STRATEGY, CONTINUED
on research and development, the Company intends to free additional cash for
sales and marketing development.
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.
PRODUCT DEVELOPMENT
The Company's supply chain management software product development process
includes design, requirements definition, software programming, and quality
assurance. On-going product development efforts are focused on the enhancement
of the features and functionality of existing products including additional
Internet capabilities, interfacing and integrating product modules, "packaging"
of the warehousing and Supply Chain Planner products and developing tools and
techniques for ease and speed of product implementation.
Research and Development. The Company is continuing to make significant product
development expenditures that it believes are necessary for it to deliver new
product features and functions. The Company's development cost for its supply
chain products were $0 and $ 879,064 in fiscal 1997 and 1998, respectively. The
Company spent approximately $900,000 on consumer software research and
development activities during fiscal 1997. The Company works closely with its
internal sales, marketing, and service staff, and externally with customers to
develop new products and enhancements that meet their needs. Product development
and documentation is done internally.
Future Product Development. The Company will continue to evaluate the need to
adapt the Company's products to emerging hardware and software platforms and
technologies. Technological advances provide opportunities for improvement in
the sophistication, technical capabilities, and performance of software
products. As a result of the emergence of new platforms, environments,
technologies, and increased competition, the Company expects to increase
resources allocated to product development. 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.
The Company is not dependent on the sources and availability of any new
materials needed to produce its products. The Company does not believe that it
will experience any adverse effect from existing or probable government
regulations. Further, the Company is not currently planning to seek any
government approval for principle products or services. Lastly, the Company is
not effected by any current or pending environmental laws.
Production Facilities. The Company operates a subsidiary to develop software in
St. Petersburg, Russia. The economic conditions in Russia, including lower wage
rates and lower standards of living, allow the Company to transact business in
St. Petersburg at a relatively low cost structure. The Company's presence in
Russia has been scaled down to only 8% if its work force as of the end of fiscal
1998 thus any change in these conditions is not expected to significantly affect
the Company.
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CUSTOMER INTEGRATION SERVICES
Due to the complexity of customer hardware and software environments, it is
often necessary to develop interfaces between the Company's supply chain
management products and the existing software in the customer's environment. If
a customer has needs that are specific to their business, it is often necessary
to develop additional functionality to satisfy these needs and make the
Company's products more effective in the customer's environment. The Company
believes that providing such technical support and project management to its
supply chain management customers is important for successful product
implementation and instrumental to continued license sales and revenue growth.
The Company intends to continue to provide such services in the future. The
Company provides these and other product-related services on a time and material
basis.
LICENSE AND SUPPORT AGREEMENTS
Software product license revenues consist principally of fees generated from the
sale of nonexclusive, nontransferable, perpetual licenses which are primarily
computer, site, and or user specific. The Company believes that packaging its
products is critical to continued license sales and revenue growth. One focus of
the Company's development effort in fiscal 1999 is to package the warehousing
and supply chain planner products. Annual software support and maintenance
agreements are sold at approximately 15% of the current list license prices.
SALES, DISTRIBUTION AND MARKETING
The Company sells its supply chain management software and services primarily
through its direct sales organization. The Company conducted sales through its
offices in Concord and Dedham Massachusetts, and Irvine and Garden Grove,
California; and through field sales personnel in the Chicago, Denver, and New
York City metropolitan areas. The Company has over 100 customers in the U.S. and
over 30 customers in Europe engaged in manufacturing, distribution and retail
businesses. The sales process usually consists of prospect identification,
prospect validation, sales presentations and product demonstrations, proposals
and system design studies. The system design studies are consulting projects
which are small in scope and result in providing customers a more definitive
project plan, timetable and cost estimate. The Company plans to expand its sales
and marketing support organizations in fiscal 1999.
The Company supports its supply chain management sales activities by conducting
a variety of marketing activities, including appearances at industry trade shows
and conferences such as those organized by the American Production and Inventory
Control Specialists (APICS) and the Council of Logistics Management (CLM). In
addition the Company conducts lead generation programs including advertising,
direct mail, telemarketing, and public relations.
COMPETITION
The Company's supply chain management products are addressing the needs of the
growing market for supply chain management software solutions. The Company's
competitors include small and large companies which offer various solutions in
different segments of the supply chain. Many of the vendors in this market, such
as SAP, Manugistics, BAAN, and Oracle, have longer operating histories, larger
customer bases, better name recognition, significantly greater financial,
technical, marketing and distribution resources than the Company.
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COMPETITION, CONTINUED
The Company is currently focused on the middle market of manufacturers and
distributors with revenue ranging from $200 million to $1 Billion. The Company
expects to compete successfully in this market for the following reasons:
o The Company is one of the few vendors offering a full range of products to
meet customer needs. In a market full of niche players and with customers
demanding integrated, easy to implement solutions from a single vendor, the
Company believes it is well positioned to compete in this market;
o The Company's "packaged product" approach provides its customers the
ability to realize benefits faster than the competition, who offer large
scale, consulting oriented services that take more than one year to
complete at a multimillion dollar cost; and
o The Company's focus on the middle market enables the Company to progress
towards delivering a price sensitive, affordable solution that addresses
the needs of customers in this market.
To the extent larger competitors either acquire or develop products with
functionality comparable to the Company's products and are able to offer them to
the middle market at competitive prices, their integrated solutions can provide
a significant competitive advantage over the Company. There can be no assurance
that the Company will be able to compete successfully with existing or new
competitors or that competition will not have a material adverse effect on the
Company's business, operating results and financial condition.
PROPRIETARY RIGHTS
The Company regards the software it develops and 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 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. The Company believes that trademarks and
copyrights are important, but less significant to the Company's success than
factors such as the knowledge, ability, and experience of the Company's
personnel, research and development, brand name recognition, and product
loyalty.
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; however, policing
unauthorized use of the Company's products is difficult. While the Company is
unable to determine the extent to which software piracy of its products exists,
software piracy is expected to be a persistent problem.
The Company believes that its products, trademarks, and other proprietary rights
do not infringe on the proprietary rights of third parties. As the number of
software products increases and the functionality of these products further
overlaps, software developers may become increasingly subject to infringement
claims. There can be no assurances that third parties will not assert
infringement claims against the Company with respect to current or future
products, or that any such assertion may not require the Company to enter into
royalty arrangements or result in costly litigation.
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QUARTERLY FLUCTUATIONS AND SEASONALITY
The level of net sales realized by the Company in any quarter is principally
dependent on the number of sold new supply chain management software licenses.
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 new order timing. From time to
time the Company may record very large individual license and or hardware sales
which can cause significant variations in quarterly results. 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 because a significant portion of the Company's expenses do not vary
with revenues. 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.
EMPLOYEES
As of May 31, 1998, the Company employed 84 people on a full-time basis. None of
the Company's employees are represented by a labor union or bound by a
collective bargaining agreement. The Company has never suffered a work stoppage.
The Company believes its future success will depend, in part, upon continued
service of a small number of key technical and senior management personnel and
on its continued ability to recruit and retain highly-skilled management and
technical personnel. Competition for such employees is intense and the loss of
services of key personnel could have a material adverse effect on the Company's
operating results and financial condition. There can be no assurance that the
Company will retain its key managerial and technical employees or that it will
be successful in attracting and retaining other highly-skilled managerial and
technical resources.
COMPLEXITY OF SOFTWARE PRODUCTS
The market for the Company's software products requires continuous upgrades due
to technological advances, introductions of new hardware platforms and operating
systems, changes in customer requirements and frequent new product
introductions. The Company's future success will depend on its ability to
continue to upgrade its products taking these changes into consideration. There
can be no assurance that the Company will be successful in developing and
marketing such new products on a timely and cost-effective basis. The Company's
failure to successfully develop and market new products and enhancements that
keep pace with the advances of the market could have a material adverse effect
on the Company's business, operating results and financial condition. The
Company's supply chain management products are very complex due to its
client/server architecture, depth of the functionality and the number of modules
and interdependencies between them. Given such product complexity, the Company's
new products may have undetected errors that would not have been found until the
installation of the product at a customer's site despite rigorous testing of the
product by the Company. Even though such infrequent occurrences have not had a
material adverse impact on the Company's business in the past, there can be no
assurance that delays related to error correction will not have a material
adverse impact on the Company's financial condition in the future.
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YEAR 2000 COMPLIANCE ISSUES
Many older computer systems and software products in use today were programmed
with a two digit date code field. These systems or software products need to be
modified, upgraded or replaced to distinguish the year 2000 ("00") as occurring
after the year 1999 ("99") in order to avoid the possibility of erroneous
results or system failures. The effects of this issue and the efforts by
companies to address it are uncertain.
Many Companies are expending significant resources to modify or upgrade their
existing software and hardware for year 2000 compliance. This might reduce funds
available to purchase other software products such as the Company's supply chain
management software. Additionally, Year 2000 problems in a customer's other
software products might significantly limit the customer's realized benefit from
the supply chain management software. These events could result in a material
adverse effect on the Company's business, operating results, financial condition
and cash flows.
The Company utilizes outside providers for services such as payroll processing
and 401(k) benefit administration, third party vendor equipment, and various
software products which may or may not be year 2000 compliant. The Company has
addressed the issue and taken steps to make sure that all such exposure is
eliminated, but failure of any critical technological component to operate
properly may have an adverse impact on business operations or require the
Company to incur unanticipated expenses to remedy any problems.
The Company's software products have been modified to be year 2000 compliant.
However, the Company's products are complex and might contain undetected errors
or failures even though intended to be year 2000 compliant. There can be no
assurance that the Company's software products contain or will contain all
necessary date code changes or that errors will not be found in new products or
product releases, resulting in loss of or delay in product acceptance. If the
Company is unable, or is delayed in its efforts to make the necessary date code
changes, there could be a material adverse effect upon the Company's business,
operating results, financial condition and cash flows.
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases approximately 15,000 square feet of office space in Bethesda,
Maryland, pursuant to a non-cancelable lease expiring in April, 2004 with an
option to renew for one additional five-year term. Of the 15,000 square feet,
the Company currently has sublet approximately 7,000 square feet through March,
2000 and approximately 8,000 square feet through the remainder of the lease term
(March, 2004). In 1996, the Company decided to relocate its headquarters from
Bethesda, Maryland to Concord, Massachusetts. The Company is currently
sub-letting 1,350 square feet from Davidson on a month-to-month basis.
Davidson's lease expires October, 1999. The Company's subsidiary located in St.
Petersburg, Russia sub-leases approximately 1,000 square feet on a
month-to-month basis.
On March 31, 1997, the Company acquired CSTI. CSTI has offices in two (2)
locations: Dedham, Massachusetts (approximately 8,000 square feet on a
three-year, non-cancelable lease expiring December, 1999); and Garden Grove,
California (approximately 3,000 square feet on a lease expiring June, 1998).
On December 8, 1997, the Company acquired Somerset. Somerset leases
approximately 9,500 square feet of office space in Irvine, California, pursuant
to a non-cancelable lease expiring in September, 1998.
13
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
The Company is not party to, nor is it aware of, any threatened litigation of a
material nature.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the quarter
ended March 31, 1998.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock and Series A Warrants are traded on the NASDAQ
Small-Cap Market System under the symbols CLTY and CLTYW, respectively. The
following table sets forth, for the periods indicated, the high and low sales
prices for the Company's Common Stock as reported by NASDAQ:
HIGH LOW
---- ---
Fiscal Year Ended March 31, 1998
First Quarter $ 2.250 $ .938
Second Quarter $ 2.469 $1.063
Third Quarter $ 1.875 $1.313
Fourth Quarter $ 1.750 $. 938
Fiscal Year Ended March 31, 1997
First Quarter $ 5.000 $3.500
Second Quarter $ 3.875 $1.750
Third Quarter $ 2.125 $1.125
Fourth Quarter $ 1.313 $ .719
The above over-the-counter market quotations reflect inter-dealer prices,
without retail mark-ups, mark-downs, or commissions and may not represent actual
transactions.
The Company has not paid cash dividends on its common stock since its
organization and does not intend to pay any cash dividends in the foreseeable
future. As of May 31, 1998, the Company had approximately 148 shareholders of
record and approximately 979 beneficial shareholders.
14
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
Business Developments
On March 31, 1997, the Company announced the acquisition of CSTI, a developer
and integrator of supply chain management software based in Dedham,
Massachusetts for approximately $3.9 million, consisting of $1.25 million in
cash, 1.2 million shares of Capitol unregistered common stock and issuance of
non-interest bearing, convertible, long-term notes totaling $1.95 million to
sellers and discounted to a value of $1.55 million. Re-payment of the notes
begins in fiscal 1999. Note holders have the right to convert a portion ($1
million) of the interest and principal owed under the notes into shares of the
Company's common stock at a $3.00 per share conversion price. This transaction
was accounted for under the purchase method of business combinations. For
additional information on this acquisition, see Footnote 7 and 9 in Item 7:
Financial Statements, on pages 34 and 37.
On April 16, 1997 after the Company's fiscal 1997 year end, the Company sold
certain of its multimedia assets to Davidson for approximately $2.5 million in
cash . The assets sold included the machinery and capital equipment utilized in
art, animation and audio production in St. Petersburg, Russia and Concord,
Massachusetts. The net asset value transferred was $472,655. The gain on the
sale resulting from this transaction was approximately $2 million. In addition,
the Company sold the stock of its Russian subsidiary, ZOA AMI, and the right to
use the name Animation Magic. As part of the transaction, the Company amended
its software development contract with Blizzard Entertainment. In addition, the
Company entered into a work-for-hire agreement with Davidson related to software
engineering services for the Warcraft Series, and assigned present the Concord,
Massachusetts offices lease to Davidson. Most of the staff in the St.
Petersburg, Russia and Concord, Massachusetts offices were transferred to
Davidson. Included in this transaction was Mr. Igor Razboff, Chairman of the
Board and CEO of Capitol Multimedia, Inc., who resigned his CEO position to
accept a position at CUC International, Inc. Mr. Razboff remained as Chairman of
the Company's Board of Directors.
On December 8, 1997, the Company acquired all of the outstanding stock of SAI, a
privately held warehouse management software company based in Irvine, California
by means of a merger between SAI and Somerset a wholly owned subsidiary of the
Company. SAI is a technology leader in the warehouse management software market.
SAI had approximately $4.5 million in annual revenue 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. For
additional information on this acquisition, see Footnote 7 and 9 in Item 7:
Financial Statements, on pages 34 and 37.
15
<PAGE>
Presentation
The Company's transformation from a multimedia developer to a supply chain
management solution provider began with the acquisition of CSTI in March, 1997
and subsequent sale of certain multimedia assets in April of 1997. Accordingly,
the discussion and analysis of the Company's results of operations compares pro
forma results for the twelve months ended March 31, 1998, to pro forma results
for the twelve months ended March 31, 1997. See Footnote 7 of the Financial
Statements in Item 7 for pro forma results. The Company believes such comparison
provides a more meaningful analysis of current and prior fiscal year results.
Pro forma Net Sales
The composition of net sales for the twelve months ended March 31, 1998 and 1997
is as follows:
Twelve Months Ended
March 31
Pro-Forma
% $
1998 1997 Change Change
---- ---- ------ ------
Business Software
Supply Chain Management $ 4,280,487 $ 3,674,692 16.5% $ 605,795
Warehouse Management 4,900,843 3,642,872 34.5% 1,257,971
Multimedia Software 343,409 638,604 (46.2)% (295,195)
------- ------- ----- --------
Total net sales $ 9,524,739 $ 7,956,168 19.7% $ 1,568,571
=========== =========== ==== ===========
Revenues from Supply Chain Management increased $605,795 or 16.5% on a pro forma
basis for the year ended March 31, 1998, versus 1997. This increase is
attributable to increases in consulting revenue and license fee income partially
offset by a decrease in support maintenance revenues. License revenue
recognition fluctuates with customer acceptance of the delivered product and
product sales to new and existing customers. The support maintenance revenue
decrease is attributable to the attrition of maintenance aagreements related to
CSTI's contract with Ross Systems to provide maintenance support to Ross
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 this will cause support revenues to increase in the long-term. The Company
also expects that actual and pro forma license fee and consulting revenues in
fiscal 1999 will increase above the actual and pro forma revenues reported for
fiscal 1998, however there can be no assurances as to the extent of such
increase or if revenues will increase at all.
Revenues from Warehouse Management increased $1,257,971 or 34.5% on a pro forma
basis for the year ended March 31, 1998, versus 1997. This increase is
attributable to increases in consulting revenue and license fees partially
offset by a decrease in hardware sales. 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 1999 will increase
above the actual and pro forma revenues reported for fiscal 1998, There can be
no assurances as to the extent of such increase, or if revenues will increase at
all.
16
<PAGE>
Pro Forma Net Sales, continued
Consumer software sales and royalties decreased $295,195 or 46.2% on a pro forma
basis for the year ended March 31, 1998, versus 1997. During the year ended
March 31, 1997, the Company recognized $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.
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 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 $946,993 or 23.2% on a pro forma basis during
the year ended March 31, 1998, versus 1997. Cost of services as a percent of
revenue from services increased only 1.5% for the year ended March 31,1998,
versus 1997. 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 1999.
Research and Development
Research and development (R&D) expense increased $109,538 or 14.4% on a pro
forma basis during the year ended March 31, 1998, versus 1997. R&D costs as a
percentage of total business software sales increased only 1% for the year ended
March 31,1998, versus 1997. The Company expects R&D costs to increase in
absolute dollars during fiscal year 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.
17
<PAGE>
Depreciation and Amortization
Depreciation and amortization only slightly changed on a pro form basis during
the year ended March 31, 1998, versus 1997. The Company expects depreciation
during fiscal year 1999 to approximate the fiscal 1998 level. On the actual
financial statements the acquisition of CSTI and Somerset Automation will
increase depreciation and the amortization of goodwill and capitalized software
in fiscal 1999. The actual amortization costs for fiscal 1998 were $188,191 and
are expected to be approximately $312,000 in fiscal 1999.
General and Administrative
General and administrative expenses decreased $51,267 or 2% on a pro forma basis
during the year ended March 31, 1998, versus 1997. The decrease came from the
consolidation of the Company's headquarters in Bethesda, Maryland into its new
facility in Concord, Massachusetts and a decrease in administrative staff. These
decreases were partially offset by administrative position increases at Somerset
necessitated by growth. General and administrative expenses as a percent of
sales are down 5% for the year ended March 31, 1998, versus 1997 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
Companyis 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 1999 versus
1998.
Sales and Marketing
Sales and marketing expense increased $142,048 or 16% on a pro forma basis
during the year ended March 31, 1998, versus 1997. 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
increased during the fourth quarter of fiscal 1998. CSTI expenditures on sales
and marketing were substantially below industry averages through the first two
quarters of fiscal 1998. 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. 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 1999.
Year 2000 Associated Expenses
The Company utilizes outside providers for services such as payroll processing
and 401(k) benefit administration, third party vendor equipment, and various
software products which may or may not be year 2000 compliant. The Company has
addressed the issue and taken steps to make sure that all such exposure is
eliminated. The expense associated with this effort has not been and is not
anticipated to be material, however failure of any critical technological
component to operate properly may require the Company to incur unanticipated
expenses to remedy any problems.
18
<PAGE>
Consolidation Charges
There are no consolidation charges in fiscal 1998, the $462,566 of consolidation
charges in the second quarter of 1997 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,
Massachusetts. This gain is excluded from the pro forma income statement.
Purchased Research and Development
In December 1997, the Company acquired SAI and incurred a third quarter
non-recurring charge to operations totaling $3,208,744 to write-off purchased
research and development which had not yet reached technological feasibility and
had no alternative future use. In addition, during March 1997, the Company
acquired CSTI and incurred a forth quarter non-recurring charge to operations
totaling $2,200,000 to write-off purchased research and development which had
not yet reached technological feasibility and had no alternative future use. See
Footnote 7 of Notes to Consolidated Financial Statements. These charges are
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's effective tax rate for
the fiscal year 1998 was approximately 7%. Please refer to Footnote 11 in the
Financial Statements included in Item 7 for additional information on deferred
tax assets and liabilities.
Liquidity and Capital Resources
The Company's primary sources of liquidity are cash, cash equivalents, and
short-term investments. During the year ended March 31, 1998, cash, cash
equivalents, and investments increased $ 584,529 or 33% to $2,341,630. This
increase relates to $2,510,000 in proceeds from the sale of select multimedia
assets less cash used in operating activities of $156,204, less $1,579,214 for
the purchase of Somerset Automation ($2,496,163 net of cash acquired of
$916,949), and $227,622 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.
Accounts receivable increased $1,173,447 or 114% to $2,200,754 at March 31,
1998. Most of this increase ($1,006,000) resulted from the Somerset acquisition
in December 1997.
Notes and guaranteed royalties receivable increased $909,893 or 364% to
$1,159,893 as a result of $1,159,893 in notes receivable which were reclassified
from long to short-term offset by the receipt of a $250,000 royalty payment.
Prepaid expenses and other current assets increased $33,047 or 43% to $109,649
primarily due to the acquisition of Somerset.
19
<PAGE>
Accounts payable and accrued liabilities increased $856,982 or 199% to
1,287,750. Most of the increase ($529,874) resulted from the Somerset
acquisition in December 1997. Payroll accruals accounted for $125,000 of the
increase with the remainder coming from an overall increase in business
activity. Income taxes payable increased $507,577 to $507,577 at March 31, 1998.
Most of the increase ($401,228) resulted from the Somerset acquisition in
December 1997, with the remainder coming from accruals for state and federal
taxes at March 31, 1998.
Unearned revenue and other current liabilities increased by $57,778 or 15% to
$453,160 due to the increase in license fee and support maintenance revenue
deferred at March 31, 1998.
The Company believes that existing cash and cash equivalent balances, short-term
investment balances and potential cash flow from operations will satisfy the
Company's working capital and capital expenditure requirements for at least the
next 12 months. However, any material acquisitions of complementary business,
products or technologies could require the Company to obtain additional sources
of financing.
The Company does not currently have plans for major capital expenditures, but
does have $1,178,051 in long-term notes payable to related parties from the
acquisitions of SAI and CSTI. The Company believes that existing cash and cash
equivalent balances, short-term investment balances and potential cash flow from
operations will satisfy this long-term liability.
At March 31, 1998, 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, 1999, 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.
Future Operating Results
This report contains forward-looking statements. For this purpose, any
statement, contained herein that are not statements of historical fact may be
deemed to be forward-looking statements. Without limiting the foregoing, the
words "believes", "anticipates", "plans". "expects", and similar expressions are
intended to identify forward-looking statements.
Numerous factors may affect the Company's business and its results of
operations. These factors include the potential for significant fluctuations in
quarterly results, dependence on new products and rapid technological change,
risk of software errors or failures, the level and intensity of competition,
lack of product diversification, dependence on certain distribution channels,
proprietary intellectual property rights, limited operating history in the
supply chain management software industry, integration of acquisitions, loss of
key employees, lack of profitability, sustaining a public trading market,
absence of dividends, and international operations. For a discussion of these
and other factors that may affect the Company's future results, see "Business"
in Item 1 of this Form 10-KSB and the 8-K filed by the Company on February 11,
1998 with the Securities and Exchange Commission.
20
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Celerity Solutions, Inc.
We have audited the accompanying consolidated balance sheets of Celerity
Solutions, Inc. as of March 31, 1998 and 1997, and the related consolidated
statement of operations, shareholders' equity, and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Celerity
Solutions, Inc. at March 31, 1998 and 1997, and the consolidated results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
Boston, Massachusetts
May 14, 1998
21
<PAGE>
Celerity Solutions, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
March 31
1998 1997
----------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 1,347,246 $ 760,065
Short-term investments 994,384 997,036
Accounts receivable, less allowance for doubtful
accounts of $ 158,600 and $ 126,394 at
March 31, 1998 and 1997, respectively 2,200,754 1,027,307
Notes and guaranteed royalties receivable 1,159,893 250,000
Prepaid expenses and other current assets 109,649 76,602
----------------------------------
Total current assets 5,811,926 3,111,010
Property and equipment: 1,266,250 1,629,249
Less: accumulated depreciation and amortization (697,577) (970,874)
----------------------------------
568,673 658,375
Capitalized software, net of accumulated amortization of $
85,992 and $ 0 at March 31,1998 and 1997
respectively 803,887 200,000
Notes receivable from related parties 117,999
Notes and guaranteed royalties receivable 1,073,600
Goodwill, net of accumulated amortization of
$ 102,198 and $ 0 at March 31, 1998 and 1997, respectively
1,134,100 827,182
Other long term assets 9,057 40,872
----------------------------------
Total assets $ 8,445,642 $ 5,911,039
==================================
</TABLE>
See accompanying notes.
22
<PAGE>
Celerity Solutions, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
March 31
1998 1997
-------------------------------------
<S> <C> <C>
Liabilities and shareholders' equity Current liabilities:
Accounts payable and accrued expenses $ 1,287,750 $ 430,768
Income taxes payable 507,577
Current portion of notes payable to related parties 1,100,797
Short-term notes payable 41,480
Unearned revenue and other current liabilities 453,160 395,382
-------------------------------------
Total current liabilities 3,390,764 826,150
Notes payable to related parties 1,178,051 1,552,069
Deferred rent 70,688 83,328
-------------------------------------
Total Liabilities 4,639,503 2,461,547
Commitments and contingencies
Shareholders' equity:
Common stock, $.10 par value, 25,000,000 and
10,000,000 shares authorized, 8,842,886 and
6,857,153 shares issued and outstanding at
March 31, 1998 and 1997 respectively 884,289 685,715
Additional paid-in capital 18,900,290 16,747,202
Accumulated deficit (13,928,096) (11,933,081)
-------------------------------------
5,856,483 5,499,836
Less treasury stock, at cost, 825,088 shares at
March 31, 1998 and 1997 (2,050,344) (2,050,344)
-------------------------------------
Total shareholders' equity 3,806,139 3,449,492
-------------------------------------
Total liabilities and shareholders' equity $ 8,445,642 $ 5,911,039
=====================================
</TABLE>
See accompanying notes.
23
<PAGE>
Celerity Solutions, Inc.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year ended March 31
1998 1997
------------------------------------------
<S> <C> <C>
Revenue:
Services $ 5,299,723 $ 1,286,203
Software licenses 749,996 639,710
Hardware and other 128,594
------------------------------------------
Total revenue 6,178,313 1,925,913
Cost of Sales
Services 3,313,782 1,465,801
Amortization of capitalized software 85,993
Hardware 98,847
------------------------------------------
Total cost of sales 3,498,622 1,465,801
Gross margin 2,679,691 460,112
Operating expenses:
Research and development 879,064 900,000
General and administrative 1,582,505 1,526,007
Sales and marketing 831,113 13,964
Purchased research and development 3,208,744 2,200,000
Amortization of goodwill 102,198
Consolidation expenses 462,567
------------------------------------------
Total operating expenses 6,603,624 5,102,538
------------------------------------------
Operating loss (3,923,933) (4,642,426)
------------------------------------------
Other income ( expense):
Interest and other income, net 240,559 270,710
Interest expense (206,245)
Gain (loss) on sale of assets 2,037,104 (37,983)
------------------------------------------
Loss before taxes (1,852,515) (4,409,699)
Income tax expense (142,500)
------------------------------------------
Net loss ($1,995,015) ($4,409,699)
==========================================
Loss per common share:
Net loss per share $ (.30) $ (.91)
==========================================
Weighted average shares outstanding 6,656,882 4,835,353
==========================================
Loss per share-assuming dilution:
Loss per share: $ (.30) $ (.91)
==========================================
Weighted average shares outstanding 6,656,882 4,835,353
==========================================
</TABLE>
See accompanying notes.
24
<PAGE>
Celerity Solutions, Inc.
Consolidated Statements of Shareholders' Equity
<TABLE>
<CAPTION>
Common Stock Additional
Par Paid-in Treasury Stock Accumulated
Shares Value Capital Shares Cost Deficit Total
------ ----- ------- ------ ---- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31,
1996 5,657,153 $ 565,715 $ 15,817,202 (825,088) $ (2,050,344) $ (7,523,382) $ 6,809,191
Issuance of
restricted common
stock for 1,200,000 120,000 930,000 1,050,000
acquisition of
CSTI, Inc.
Net loss (4,409,699) (4,409,699)
------------------------------------------------------------------------------------------------------
Balance at March 31,
1997 6,857,153 685,715 16,747,202 (825,088) (2,050,344) (11,933,081) 3,449,492
Issuance of
restricted common
stock for
acquisition of
Somerset
Automation, Inc. 1,958,233 195,824 2,118,025 2,313,849
Stock option
exercise 27,500 2,750 35,063 37,813
Net loss (1,995,015) (1,995,015)
------------------------------------------------------------------------------------------------------
Balance at March 31,
1998 8,842,886 $ 884,289 $ 18,900,290 (825,088) $ (2,050,344) $(13,928,096) $ 3,806,139
======================================================================================================
</TABLE>
See accompanying notes.
25
<PAGE>
Celerity Solutions, Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended March 31
1998 1997
--------------------------
<S> <C> <C>
Operating activities:
Net income (loss) $(1,995,015) $(4,409,699)
Adjustments to reconcile net income to net cash provided
(used) by operating activities:
Depreciation 222,459 200,633
Amortization - goodwill and capitalized software 188,191
Write-off of in-process tech. from acquisitions 3,208,744 2,200,000
(Gain) loss on sale of assets (2,037,104) 37,983
Changes in operating assets and liabilities:
Accounts receivable (320,998) 44,171
Prepaid expenses and other current assets (10,073) 122,720
Short-term notes receivable 163,707 500,000
Long-term notes, royalties, and other assets 37,201 (87,917)
Accounts payable and accrued expenses 327,108 184,971
Income tax payable 55,611
Long-term notes payable (19,843)
Current portion notes payable (21,330)
Unearned revenue and deferred rent 45,138 (59,191)
--------------------------
Net cash used by operating activities (156,204) (1,266,329)
Investing activities:
Purchases of short-term investments (994,385) (404,165)
Proceeds from sales of short-term investments 997,036 1,770,104
Proceeds from sale of assets 2,509,757 1,951
Purchase of Somerset and CSTI, net of cash acquired (1,579,214) (1,095,562)
Capital expenditures (227,622) (207,327)
--------------------------
Net cash provided by investing activities 705,572 65,001
Financing activities:
Proceeds from sale of common stock 37,813
--------------------------
Net cash provided by financing activities 37,813
--------------------------
Net increase (decrease) in cash & cash equivalents 587,181 (1,201,328)
Cash and cash equivalents at beginning of year 760,065 1,961,393
--------------------------
Cash and cash equivalents at end of year $ 1,347,246 $ 760,065
==========================
</TABLE>
Non-cash financing activities:
In fiscal 1997 the Company purchased all shares of Client Server Technologies,
Inc. for $3,853,060. This transaction was partially financed by the issuance of
1,200,000 shares of common stock and with seller notes payable totaling
$1,552,069. In fiscal 1998 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 Footnote 7.
See accompanying notes.
26
<PAGE>
Celerity Solutions, Inc.
Notes to Consolidated Financial Statements
1. Organization and Business
Celerity Solutions, Inc. (the "Company") formerly known as Capitol Multimedia,
Inc., a Delaware corporation organized in 1982, develops and markets software in
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. The
Company's product line enables control of inventory and resources not only
between locations in the supply chain but through warehouses as well. The
Company has positioned itself to provide integrated warehouse and supply chain
management software for the middle market. Prior to April 1, 1997, the Company
was in the multimedia children's edutainment market creating, producing, and
licensing interactive software for the CD-ROM (PC and Mac) platform.
On March 31, 1997, the Company executed one of its strategic initiatives to
revitalize the Company through entry into the business software market by
acquiring Client Server Technologies, Inc. (CSTI). CSTI's "Continuum" product
set provides software solutions and integration services for logistics,
planning, distribution and financial functions. Please see Footnote 7 for more
detailed information on the acquisition.
On April 16, 1997, the Company sold selected multimedia assets to Davidson &
Associates, Inc., a division of CUC International, Inc. The assets that were
sold include art, animation and audio production capabilities located in St.
Petersburg, Russia, and Concord, Massachusetts. Please see Footnote 7 for more
detailed information on the divestiture.
On December 8, 1997, the Company acquired all of the outstanding stock of
Somerset Automation, Inc. (SAI). SAI is a technology leader in the warehouse
management software market. It's WMS 4.0 software, is client server based,
highly flexible, user configurable, and supports single and multiple facility
enterprises. Please see Footnote 7 for more detailed information on the
acquisition.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All significant inter-company accounts and
transactions have been eliminated.
Cash and Cash Equivalents
For purposes of the statements of cash flows, cash and cash equivalents consist
of cash in banks and investments in highly liquid, short-term instruments with
original maturities of 90 days or less. Cash equivalents consist principally of
overnight repurchase agreements.
The Company believes that existing cash and cash equivalent balances, short term
investment balances, and potential cash flow from operations, as a result of the
acquisitions and the disposition as described in Footnote 7 will satisfy the
Company's working capital and capital expenditure requirements for at least the
next 12 months.
27
<PAGE>
Celerity Solutions, Inc.
Notes to Consolidated Financial Statements
2. Summary of Significant Accounting Policies, continued
Short-Term Investments
The Company accounts for its short-term investments under Statement of Financial
Accounting Standards (SFAS) No. 115, " Accounting for Certain Investments in
Debt and Equity Securities." The Company has classified all marketable
investment securities as available-for-sale. Available-for-sale securities are
carried at fair market value with unrealized gains and losses reported as a
separate component of shareholders' equity. Any realized gains or losses and
declines in value judged to be other than temporary are included in other income
(expense). The difference between cost and fair value was immaterial at March
31, 1998 and 1997, and no adjustments have been made to the historical carrying
value of the investments and no unrealized gains or losses have been recorded as
a separate component of stockholders' equity. At March 31, 1998, marketable
investment securities consisted of corporate bonds and U.S. Government backed
notes, maturing at various dates, and in varying amounts, between 1998 and 2001.
These securities are recorded at cost which approximates fair market value.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to credit risk
consist primarily of accounts receivable and notes and guaranteed royalties
receivable. The risk is minimized by the creditworthiness of the Company's
customers, and the Company's credit and collection policies. The Company
performs ongoing credit evaluations of its customers, generally does not require
collateral, and maintains allowances for potential credit losses which, when
realized, have been within the range of management's expectations. As of March
31, 1998, approximately 47% of accounts receivable were concentrated with five
customers.
Long-Lived Assets
The Company has adopted SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of" which establishes
criteria for the recognition of an impairment loss related to long-lived assets.
The Company periodically assesses the recoverability of long-lived assets,
including property and equipment and intangibles, when there are indications of
potential impairment based on estimates of undiscounted future cash flows. The
amount of impairment is calculated by comparing anticipated discounted future
cash flows with the carrying value of the related asset. This has not had a
material effect on the Company.
Property and Equipment
Property and equipment are recorded at cost and depreciated on a straight-line
basis over estimated useful lives. Repair and maintenance expenditures are
charged to operations as incurred. Estimated useful lives are as follows:
Furniture and fixtures 5 - 7 years
Computers and equipment 3 - 5 years
Purchased Software 3 years
Leasehold improvements 3-10 years
28
<PAGE>
Celerity Solutions, Inc.
Notes to Consolidated Financial Statements
2. Summary of Significant Accounting Policies, continued
Property and Equipment, continued
Property and equipment are made up of the following major classes:
March 31
----------------------------
1998 1997
----------------------------
Property and equipment:
Computers and technical equipment $ 754,543 $ 1,133,279
Furniture and fixtures 259,751 235,003
Other 251,956 260,967
----------------------------
Total property and equipment 1,266,250 1,629,249
Accumulated depreciation (697,577) (970,874)
============================
Net property and equipment $ 568,673 $ 658,375
============================
Capitalized Software Costs
The Company accounts for software development costs in accordance with SFAS No.
86, "Accounting for Software Development Costs". Under SFAS No. 86, software
development costs incurred until technological feasibility is established are
expensed as research and development. Software development costs incurred after
technological feasibility is established are capitalized and amortized over the
products' useful lives commencing with general release. Amortization is provided
using the straight-line method over the useful life which generally is five
years or less. All capitalized software is amortized on a product-by-product
basis using the ratio that current gross revenues bear to the total of current
and anticipated future gross revenues with minimum amortization based on a
straight-line method over the product's useful life. The establishment of
technological feasibility and the ongoing assessment of recoverability of
capitalized software costs requires considerable judgment by management with
respect to numerous external factors, including, but not limited to, anticipated
future gross revenues, competition, estimated economic lives and changes in
software and hardware technologies. Provisions for declines in the net
realizable value of capitalized software costs are made in the period in which
they first become determinable (See Footnote 4).
Goodwill
Goodwill represents the excess purchase price paid over the net assets acquired
in the purchase of CSTI on March 31, 1997 and SAI on December 8, 1997. (See
Footnote 7). Goodwill is being amortized on a straight-line basis over 10 and 7
year periods for CSTI and SAI, respectively, management's estimate of the useful
life.
Revenue Recognition
Revenue derived from the sale of software and hardware products and software
licensing arrangements is recognized in accordance with Statement of Position
97-2 "Software Revenue Recognition" issued by the American Institute of
Certified Public Accountants.
29
<PAGE>
Celerity Solutions, Inc.
Notes to Consolidated Financial Statements
Summary of Significant Accounting Policies, continued
Revenue related to the multimedia business, net of allowances for returns, is
recognized upon shipment. Licensing fees and royalties pursuant to licensing
arrangements are recognized when the Company fulfills all its obligations in
accordance with such agreements. Unearned revenue represents payments received
in advance of the performance of software related services. Revenues related to
development services are recorded as services are rendered and costs incurred.
The Company derives three types of revenues from the supply chain sector of the
business software market. Services for time and material modifications or
consulting contracts are recorded as they are rendered and related costs
incurred. License fee revenue is recorded based upon the
percentage-of-completion method of accounting for long-term modification and
consulting contracts. Provisions for anticipated losses are made in the period
in which they first become determinable. Software support contract revenue is
recognized ratably over the term of the contract.
The Company generally warrants that its products will function substantially in
accordance with documentation provided to customers for approximately six months
following initial installation. As of March 31, 1998, the Company had not
incurred any significant expenses related to warranty claims.
Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board issued Statement No.
123 (FAS No. 123), "Accounting for Stock-Based Compensation" which is effective
for fiscal years beginning after December 15, 1995. FAS No. 123 permits a
company to choose either a new fair value-based method or the current Accounting
Principles Board Opinion No. 25 (APB 25) intrinsic value-based method of
accounting for its stock-based compensation arrangements. The Company has
elected to continue to account for its stock-based compensation plans utilizing
the provisions of APB 25. FAS No. 123 requires disclosure of pro forma
information regarding net income and net income per share based on fair value
accounting for stock-based compensation plans. This disclosure is presented in
Footnote 10.
Income Taxes
The Company accounts for income taxes under the liability method.
Net Income (Loss) Per Share
In February 1997, the Financial Accounting Standards Board (FASB) 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. This disclosure is presented in Footnote 6.
30
<PAGE>
Celerity Solutions, Inc.
Notes to Consolidated Financial Statements
2. Summary of Significant Accounting Policies, continued
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Significant areas in which estimates are
used include revenue recognition, useful lives of furniture and equipment and
certain accrued expenses. Actual results could differ from those estimates.
Reclassification
Certain amounts in the 1997 financial statements have been reclassified to
conform to the 1998 presentation.
Segment Reporting and Comprehensive Income
In June 1997, the FASB issued Statements No. 131, "Disclosure about Segments of
an Enterprise and Related Information" and No. 130 " Reporting Comprehensive
Income", 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 these statements are adopted, comparative
information for previous years is required to be restated to comply with their
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.
Geographic Area of Operations
At March 31, 1998, only 8% of the Company's labor force was employed by the
Company's subsidiary in St. Petersburg, Russia. On April 16, 1997, the Company
sold certain multimedia assets to Davidson and Associates including the Russian
labor force, as more fully explained in Footnote 6. At that time 65% of the
Company's labor force had been at the St. Petersburg, Russia facility. Economic
conditions in Russia, including lower wage rates and lower standards of living,
allow the Company to transact business in St. Petersburg at a relatively low
cost structure. Changes in the political, social, or economic stability, or
significant changes in the exchange rate of the Russian Ruble would not have a
significant affect on the Company's operations.
Foreign Currency Transactions
As the functional currency of the Company's foreign subsidiary is the United
States dollar, the Company does not record foreign currency translation
adjustments. Foreign currency transaction gains and losses are a result of the
effect of exchange rate changes on transactions denominated in currencies other
than the functional currency and are generally included in determining net
income (loss) for the period in which the exchange rate changes. Such amounts
were not material for fiscal years 1998 or 1997.
31
<PAGE>
Celerity Solutions, Inc.
Notes to Consolidated Financial Statements
3. Notes Receivable from Related Parties
As part of the December 8, 1997 acquisition of Somerset Automation, Inc., (SAI)
the Company entered into loan agreements with several former SAI shareholders.
These 7.5% interest bearing notes are secured by the notes payable to these
shareholders resulting from the same acquisition as more fully described in
Footnote 9 " Long-term Debt and Lease Commitments". The notes receivable are to
be repaid by offsetting amounts due from the notes payable. The balance
receivable as of March 31, 1998 was $117,999 including interest.
4. Capitalized Software Costs
Capitalized software costs represent purchased developed software resulting from
the acquisitions of CSTI on March 31, 1997 and SAI on December 8, 1997. (See
Footnote 7). Capitalized software is being amortized on a straight-line basis
over 5 years for CSTI and SAI, which is management's estimate of the useful
life.
5. Guaranteed Minimum Royalty Receivable
On August 11, 1995, the Company entered into an Asset Purchase Agreement ("the
Agreement") with Philips Media, Inc. ("Philips") to sell certain assets used by
its professional CD-i operations. Receivables related to this transaction are
disclosed below.
In connection with its June 1993 sale of video post-production assets, the
Company holds a secured note for $800,000, interest accruing at 8.0% and
compounding annually, principal plus accrued interest due on July 31, 1998 with
an option to convert the note into stock of the purchaser at any time after the
purchaser, in its sole discretion, reorganizes as contemplated from an S
Corporation to a C Corporation. The interest rate on the note may be adjusted
from time to time over the term of the obligation as interest is charged at a
rate equal to the interest rate set by the purchaser's bank in its loan for the
purchase of the assets. The receivable balances under this agreement are
presented below:
March 31
------------------------------
1998 1997
------------------------------
Notes receivable, current:
Henninger (including accrued interest) $ 1,159,893
Philips $ 250,000
------------------------------
Total Current 1,159,893 250,000
------------------------------
Long-term notes receivable
Henninger (including accrued interest) 1,073,600
------------------------------
Total long-term 1,073,600
==============================
Total notes receivable $ 1,159,893 $ 1,323,600
==============================
32
<PAGE>
Celerity Solutions, Inc.
Notes to Consolidated Financial Statements
6. 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>
March 31
----------------------------
1998 1997
----------------------------
<S> <C> <C>
Numerator:
Net loss $1,995,015) $(4,409,699)
----------------------------
Numerator for loss per common share and loss per
share-assuming dilution $1,995,015) $(4,409,699)
============================
Denominator:
Denominator for loss per common share-weighted
average shares outstanding 6,656,882 4,835,353
Effect of dilutive securities: * *
----------------------------
Denominator for diluted loss per share- adjusted
weighted average shares 6,656,882 4,835,353
============================
Loss per common share and loss per common share-
assuming dilution $ (.30) $ (.91)
============================
</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 302,898 and 43,120 shares as of the
years ended March 31, 1998 and 1997. In addition, there were options to purchase
884,026 shares at exercise prices between $1.50 and $4.66 per share outstanding
at March 31, 1998 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 March 31, 1998,
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.
33
<PAGE>
Celerity Solutions, Inc.
Notes to Consolidated Financial Statements
7. 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,
Massachusetts. 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.
34
<PAGE>
Celerity Solutions, Inc.
Notes to Consolidated Financial Statements
7. Acquisition of CSTI, sale of multimedia assets, and acquisition of SAI,
continued
Supplemental pro forma results of operations for the years ended March 31, 1998
and 1997, assuming the above transactions were consummated prior to April 1,
1996, are presented below.
Pro Forma Year Ended
March 31
1998 1997
----------------------------
Revenue:
Services $ 8,042,125 $ 6,025,245
Software licenses 1,245,596 1,589,801
Hardware and other 237,018 341,122
----------------------------
Total revenue 9,524,739 7,956,168
Cost of sales
Services 4,658,299 3,679,492
Hardware and other 189,476 232,793
Amortization of capitalized software 189,475 177,972
----------------------------
Total cost of sales 5,037,250 4,090,257
----------------------------
Gross margin 4,487,489 3,865,911
Operating expenses:
Research and development 871,549 762,011
General and administrative 2,505,157 2,556,424
Sales and marketing 1,030,480 888,432
Consolidation charges 462,566
Amortization of goodwill 130,243 141,164
----------------------------
Total operating expenses 4,537,429 4,810,597
----------------------------
Operating loss (49,940) (944,686)
Other income (expense):
Interest and other income, net 192,902 270,705
Interest expense (245,900) (246,217)
----------------------------
Loss before income taxes (102,938) (920,198)
Income tax (expense) benefit (18,000) (36,061)
----------------------------
Net loss (120,938) (956,259)
============================
Loss Per Common Share:
Net loss per share
(.02) (.12)
============================
Weighted average shares outstanding 7,997,846 7,990,298
============================
Loss Per Share-Assuming Dilution:
Net loss per share
(.02) (.12)
============================
Weighted average shares outstanding 7,997,846 7,990,298
============================
35
<PAGE>
Celerity Solutions, Inc.
Notes to Consolidated Financial Statements
8. Fair Value of Financial Instruments
The estimated fair value of the company's financial instruments are as follows:
March 31, 1998 March 31, 1997
-------------- --------------
Carrying Fair Carrying Fair
Amount Value Amount Value
--------------------------------------------------
Assets:
Cash and cash equivalents $1,347,246 $1,347,246 $ 760,065 $ 760,065
Short-term investments 994,384 994,384 997,036 997,036
Notes and guaranteed
royalties receivable 1,159,893 1,159,893 250,000 250,000
Long-term notes and
guaranteed royalties
receivables 117,999 117,999 1,073,600 1,073,600
Notes receivable from
related parties
Liabilities:
Notes payable to related
parties 1,100,797 1,100,797
Notes payable 41,480 41,480
Long-term notes payable
to related parties $1,178,051 $1,178,051 $1,552,069 $1,552,069
Fair values were determined as follows:
The carrying amounts of cash and cash equivalents and short-term notes and
guaranteed royalties receivable approximates fair value because of the
short-term maturity of these instruments.
Short-term investments approximate fair value because of the short-term maturity
of these investments. These securities have been recorded at cost which
approximates fair market value.
Long-term notes receivable are estimated by discounting future cash flow using
the current rates at which similar loans would be made to borrowers with similar
credit ratings. This estimated fair value approximates the historical carrying
value of the receivable.
Long-term notes payable to related parties are estimated by discounting the
future cash flow by the estimated current rates offered to the Company for debt
of the same maturities. This estimated fair value approximates the historical
carrying value of these notes payable.
36
<PAGE>
Celerity Solutions, Inc.
Notes to Consolidated Financial Statements
7. Long-Term Debt and Lease Commitments:
Long-term debt to related parties consist of the following:
Year Ended March 31
1998 1997
--------------------------
1. Convertible unsecured non-interest
bearing notes payable to various
employee stockholders issued in
connection with the acquisition of CSTI,
with payments totaling $376,185 due
12/31/98 $ 317,852 $ 320,157
2. Convertible secured non-interest bearing
note payable to Officer issued in
connection with the acquisition of CSTI,
with a $568,815 payment due 12/31/98 and
12 quarterly payments of $83,333 each
beginning April 1, 1998. 1,228,257 1,231,912
3. Notes payable to various employees at a
7.5% interest rate issued in connection
with the acquisition of SAI, with 3
quarterly payments due of $250,000 each
beginning April 1,1999 and a forth
quarterly payment of $93,836 due October
1, 2000; payments include interest. 732,738
--------------------------
Total debt to related parties 2,278,847 1,552,069
--------------------------
Less current portion 1,100,797 --
--------------------------
Total long-term debt to related parties $1,178,050 $1,552,069
==========================
Notes 1 and 2 are convertible into common shares at $3.00 per share (conversion
price) by debt holders with respect to the portion due on the notes on December
31, 1998.
Note 2 is secured by a continuing security interest in and all right, title, and
interest of CSTI or the Company in collateral, provided that CSTI held such
right, title, and interest to the collateral as of the closing on March 31,
1997. Collateral specifically refers to the following: (a) any right, title and
interest in and to computer software developed by CSTI with improvements and
enhancements added hereafter, and (b) the names and addresses of CSTI's past or
present customers. "Collateral" does not include: (1) computer software
hereafter developed or acquired by CSTI or Celerity that represents product
functionality that is not in the CSTI computer software as of the date first
written above including without limitation interfaces which may hereafter be
developed to the current CSTI software; (2) any plans or processes relating to
the production, sale and distribution of the Collateral; (3) any computer
software or other products that incorporate or utilize any element of the
Collateral pursuant to any license agreements whether now owned or hereafter
acquired; or (4) the proceeds, income or royalties attributable to such computer
software prior to an Event of Default. Both of the non-interest bearing
long-term notes have been discounted from their face value using an assumed
interest rate of 10%.
Note 3 is subject to the following prepayment provision. Within 15 days of the
end of a month in which the Company receives license fees relating to Somerset
warehousing software , the company will pay an aggregate amount equal to 30% of
the license fee received, until the notes are paid in full. It is also subject
to a security interest in and to all right, title and
37
<PAGE>
Celerity Solutions, Inc.
Notes to Consolidated Financial Statements
9. Long-Term Debt and Lease Commitments, continued:
interest of Somerset in the collateral, provided that SAI held such right and
interest to the collateral as of the closing date.
Line of Credit
SAI entered into a $250,000 revolving line of credit agreement with a financial
institution on February 13, 1997. The line matures in February 2002 and is
secured by substantially all of Somerset's assets. Advances under the line bear
interest at the bank's prime rate plus .5% ( 9% at March 31, 1998) and interest
payments are made on a monthly basis. The line is also subject to an unused
commitment fee of .625% per annum on the daily unused amount of the commitment.
At March 31, 1998 Somerset had a current liability of $13,287 for this line.
Lease Commitments
The Company leases office space, computer hardware and office equipment under
non-cancelable operating leases expiring on various dates through 2004. The
Company also leases computer hardware and office equipment under capital leases
which expire during Fiscal 1999. Total rent expense for operating and capital
leases amounted to $ 556,429 and $ 343,448 for the years ended March 31, 1998
and 1997, respectively. At March 31, 1998, minimum annual commitments under
noncancelable operating and capital leases are as follows:
Capital Operating
leases leases
Fiscal year ending March 31:
----------------------------
1999 $ 28,193 $ 447,987
2000 271,287
2001 212,966
2002 215,494
2003 216,796
Thereafter 216,871
========================
Total $ 28,193 $ 1,581,401
========================
The Company sub-leases out its former office in Bethesda, Maryland under two
non-cancelable operating leases. One lease runs through April 2000 and one
through the end of the Company's lease in fiscal 2004. These leases require that
minimum lease payments be made to the Company of $249,123 and $1,330,427,
respectively.
38
<PAGE>
Celerity Solutions, Inc.
Notes to Consolidated Financial Statements
10. Capital Stock
Warrants
At March 31, 1998, the Company had outstanding warrants to purchase 597,700
shares of its common stock, as follows:
In April 1992, the Company issued Series A Warrants to purchase 492,700 shares
(344,500 warrants, each of which entitles the holder to purchase 1.74 shares of
Common Stock) at an exercise price of $3.57 per share through March 31, 1998.
The number of shares and exercise price above are recalculations based on
anti-dilutive provisions in the Warrants. These Warrants have been extended
through March 31, 1999.
In April 1993, in connection with the Regulation S offering, the Company issued
a warrant to purchase 80,000 shares of common stock to the placement agent at a
price of $8.25 per share, exercisable for a four year period commencing April 9,
1994.
In May 1997, in connection with an agreement for investment banking services,
the Company issued 25,000 warrants to purchase one share of the Company's common
stock at $1.24 per share for a period of three years.
Stock Options
At March 31, 1998, the Company had outstanding options to purchase 1,794,526
shares of its Common Stock as follows:
Grants Pursuant to Employment Arrangements
During 1995, the Company granted options to purchase 330,000 shares of common
stock, with a $3.898 weighted average exercise price per share, pursuant to
various employment arrangements. At September 13, 1996, options to purchase
230,000 shares were canceled, and in August 1997 options to purchase 72,000
shares were cancelled. At March 31, 1998, options to purchase 28,000 shares of
common stock at $3.75 per share were outstanding with expiration dates of March
31, 2006. 28,000 shares were exercisable at the $3.75 exercise price per share
at March 31, 1998.
Non-Qualified Employee Stock Option Plan
In 1993, the Company adopted the Amended and Restated 1991 Non-Qualified
Celerity Solutions, Inc. (Capitol Multimedia, Inc.) Employee Stock Option Plan
(the Employee Plan). In August 1997, the Company amended this Employee Plan to
reflect the Company name change and to permit the Company to grant options for
3,000,000 shares of common stock to its employees and consultants. Options are
granted at the fair market value of the Company's common stock on the date of
grant.
39
<PAGE>
Celerity Solutions, Inc.
Notes to Consolidated Financial Statements
10. Capital Stock, continued
The following table sets forth employee stock options granted, exercised,
canceled, and outstanding under the Employee Plan:
Outstanding Options
-------------------
Number of Weighted Average
Options Exercise Price
-----------------------------------
Balance at March 31, 1996 416,761 $ 4.9130
Granted 1,091,476 2.1770
Canceled (313,576) 4.4390
-----------------------------------
Balance at March 31, 1997 1,194,661 $ 2.5370
Granted 447,000 1.3557
Exercised (27,500) 1.0800
Expired (27,450) 6.1597
Canceled (130,185) 5.7624
-----------------------------------
Balance at March 31, 1998 1,456,526 $1.8456
===================================
At March 31, 1998, 717,526 options outstanding under the Employee Plan were
exercisable. There were 1,386,688 and 176,053 option shares available for grant
under the Employee Plan at March 31, 1998 and 1997, respectively.
Non-Qualified Stock Option Plan for Non-Employee Directors
In 1995, the Company adopted the Amended and Restated 1992 Non-Qualified Stock
Option Plan for Non-Employee Directors (the Director Plan). In August 1997, the
Company amended the Director Plan to permit the Company to grant options to
purchase 600,000 shares of common stock to its non-employee directors. Grants of
options to purchase 15,000 shares of common stock at fair market value are
automatic upon a director's election to the Board and on the date of each
subsequent annual meeting during a director's tenure. Each option granted under
the Director Plan is exercisable for five years from the date of grant.
The following table sets forth non-employee director stock options granted,
exercised, canceled, and outstanding under the Director Plan:
Outstanding Options
-------------------
Number of Weighted Average
Options Exercise Price
-----------------------------------
Balance at March 31, 1996 160,000 $ 3.916
Granted 60,000 2.920
-----------------------------------
Balance at March 31, 1997 220,000 3.644
Granted 90,000 1.550
-----------------------------------
Balance at March 31, 1998 310,000 $ 3.036
===================================
40
<PAGE>
Celerity Solutions, Inc.
Notes to Consolidated Financial Statements
10. Capital Stock, continued
At March 31, 1998, 220,000 options outstanding under the Director Plan were
exercisable. There were 290,000 and 80,000 option shares available for grant
under the Director Plan at March 31, 1998 and 1997, respectively.
The Financial Accounting Standards Board Statement No. 123 (FAS No. 123),
"Accounting for Stock-Based Compensation" requires disclosure of pro forma
information regarding net income and net income per share based on fair value
accounting for stock-based compensation plans. The following table presents
weighted average price and life information about significant option groups
outstanding at March 31, 1998:
<TABLE>
<CAPTION>
Shares outstanding Options Exercisable
------------------ -------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life (years) Price Exercisable Price
- --------------- ----------- ------------ -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ .83 to $ 1.46 920,500 5.18 $ 1.0105 345,500 $ .9569
$ 1.55 to $ 2.92 304,000 4.21 $ 1.8322 60,000 $ 2.9200
$ 3.75 to $ 4.66 570,026 3.91 $ 3.9424 560,026 $ 3.9296
- -----------------------------------------------------------------------------------------------
$ .83 to $ 4.66 1,794,526 4.61 $ 2.0810 965,526 $ 2.8031
===============================================================================================
</TABLE>
Pursuant to the requirements of FAS 123, the following are the pro forma net
income and net income per share for March 31, 1998 and 1997, as if the
compensation expense for the option plans had been determined based on the fair
value at the grant date for grants in the years then ended:
<TABLE>
<CAPTION>
March 31, 1998 March 31, 1997
-------------- --------------
As Reported Pro Forma As Reported Pro Forma
<S> <C> <C> <C> <C>
Net income (loss) $ (1,995,015) $ (2,406,070) $ (4,409,699) $ (4,795,905)
================================================================
Net income per
share $ (.30) $ (.36) $ (.91) $ (.99)
================================================================
</TABLE>
The fair value of options at the date of grant were estimated using the
Black-Scholes model with the following weighted average assumptions:
OPTIONS
1998 1997
---- ----
Volatility 1.000 .768
Expected option life (years) 4 yrs. 4 yrs.
Interest rate ( risk free) 6.00% 6.20%
Volatility was calculated on a monthly basis. The company has never declared nor
paid dividends on any of its capital stock and does not expect to do so in the
foreseeable future. The effects on 1998 and 1997 pro forma net income and net
income per share of expensing the estimated fair value of stock options and
shares are not necessarily representative of the effects on reporting the
results of operations for future years as the periods presented include only one
and two years of option grants under the Company's plans.
41
<PAGE>
Celerity Solutions, Inc.
Notes to Consolidated Financial Statements
11. Income Taxes
The provision for income taxes includes a federal alternative minimum tax
("AMT") resulting from restrictions on the use of net operating loss
carryforwards for AMT purposes. Significant components of deferred tax assets as
of March 31 are as follows:
<TABLE>
<CAPTION>
1998 1997
-------------------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 2,927,000 $ 3,584,000
Depreciable and amortizable assets 8,000
Unearned revenue 3,000
Allowance for doubtful accounts 56,000 51,000
Alternative minimum tax credit carryfoward 43,000 43,000
Investment tax credit carryforwards 281,000 281,000
Accrued Expenses 57,000 43,000
-------------------------
Total Deferred Assets 3,372,000 4,005,000
Deferred tax liabilities:
Deferred Income (110,000)
Depreciable and amortizable assets (8,000)
Cash to accrual difference from acquired companies (188,000) (58,000)
Prepaid Expense (24,000) (11,000)
-------------------------
Total Deferred Liabilities (212,000) (187,000)
-------------------------
Net deferred assets: 3,160,000 3,818,000
Valuation allowance for net deferred tax assets (3,160,000) (3,818,000)
==========================
Net deferred assets: $ $
===========================
</TABLE>
At March 31, 1998 and 1997, the Company had Federal tax net operating loss
carryforwards of $8,607,000 and $10,542,000, respectively. The valuation
allowance for deferred tax assets increased by $ 658,000 from 1997 to 1998. Tax
net operating loss and investment tax credit carryforwards expire in varying
amounts beginning in 1998 through 2012. Tax net operating loss and tax credit
carryforwards are subject to limitation in the event of certain corporate
ownership changes under Internal Revenue Code Sections 382 and 383.
12. Significant Customers
During 1998, the Company had sales of approximately $ 865,000 and $ 717,000 to
two customers which represented 14% and 12% of net sales, respectively. During
1997, the Company had sales of approximately $ 673,000 and $491,000 to two
customers which represented 35% and 25% of net sales, respectively.
13. Consolidation charges
During the year ended March 31, 1997,the Company recognized $462,567 in one-time
consolidation charges consisting of severance benefits and fees relating to
subleasing its facilities in Maryland.
42
<PAGE>
Celerity Solutions, Inc.
Notes to Consolidated Financial Statements
14. Employee Retirement Plan
On July 1, 1989, the Company adopted a 401K retirement plan (the Retirement
Plan) that covers substantially all of the Company's employees. Each eligible
employee may contribute up to 15% of their compensation, subject to certain
limitations, to the retirement plan. The Company makes a matching contribution
of 50% on the first 6% of the participant's elective deferral.
The Company acquired CSTI on March 31, 1997 and SAI on December 8, 1997. Each
Company maintained a 401K retirement plan. The CSTI Plan was merged into the
Company's plan as of April 1, 1998. The SAI plan is being merged into the
Company's plan with an anticipated merger date of July 1, 1998.
Company contributions totaled $ 35,355 and $ 23,812 during the years ended March
31, 1998 and 1997, respectively.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Not applicable.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS
The information required by this item is incorporated by reference to the
information contained in the "Election of Directors" and "Executive Officers"
sections of the Company's Proxy Statement for its 1998 Annual Meeting of
Shareholders.
ITEM 10. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the
information contained in the "Executive Compensation" section of the Company's
Proxy Statement for its 1998 Annual Meeting of Shareholders.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICAL OWNERS AND
MANAGEMENT
The information required by this item is incorporated by reference to the
information contained in the "Security Ownership of Certain Beneficial Owners"
and "Security Ownership of Management" sections of the Company's Proxy Statement
for its 1998 Annual Meeting of Shareholders.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the
information contained in the "Transactions with Beneficial Owners, Directors,
and Executive Officers" section of the Company's Proxy Statement for its 1998
Annual Meeting of Shareholders.
43
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS:
A list of the exhibits included as part of this report is set forth in the
Exhibit index which immediately precedes such exhibits and which is incorporated
herein by reference.
REPORTS ON FORM 8-K
On February 11, 1998, the Company filed a Form 8-K updating Risk Factors
applicable to the business. The Company believed that it was necessary to update
the Risk Factors to reflect the current business situation given the
transformation of the Company from a multimedia developer into a supply chain
management solution provider.
44
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
organized.
CELERITY SOLUTIONS, INC.
BY: /s/ Luda Kopeikina
-------------------------
Luda Kopeikina, President and
Chief Executive Officer,
June 24, 1998
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
thereby constitutes and appoints Luda Kopeikina and Edward Terino and each of
them, his or her true and lawful attorney-in-fact and agent with full power of
substitution and resubstitution, for him or her and in his or her name, place
and stead, in any and all capacities to sign any and all amendments or
supplements to this Form 10-KSB, and to file the same, with all exhibits thereto
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorney-in-fact and agent full power and
authority to do and perform each and every act and thing necessary or
appropriate to be done in and about the foregoing, as fully to all intents and
purposes as he or she might or could do in person, lawfully do, or cause to be
done by virtue hereof.
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
NAME TITLE & DATE
- ---- ------------
/s/ Luda Kopeikina President, CEO & Director
- ---------------------- June 24, 1998
Luda Kopeikina
/s/ Edward Terino Chief Financial Officer
- ---------------------- June 24, 1998
Edward Terino
/s/ James P. Dore Controller
- ---------------------- June 24, 1998
James P. Dore
/s/ Robert Donaldson Director
- ---------------------- June 24, 1998
Robert Donaldson
Director
- ----------------------
Nico Letschert
/s/ Igor R. Razboff Director
- ---------------------- June 24, 1998
Igor R. Razboff
/s/ Philip R. Redmond Director
- ---------------------- June 25, 1998
Philip R. Redmond
/s/ Richard Santagati Director
- ---------------------- June 25, 1998
Richard Santagati
Director
- ----------------------
Alan White
45
<PAGE>
Exhibit
Number Exhibit Name
2.1 Agreement for the Acquisition of the Outstanding Stock of Animation
Magic, Inc. Management Shareholders, dated December 15, 1994
(incorporated by reference herein to the exhibit filed with the
Company's Form 8-K, dated February 13, 1995).
2.2 Agreement for the Acquisition of the Outstanding Stock of Animation
Magic, Inc. Minority Shareholders, dated December 15, 1994
(incorporated by reference herein to the exhibit filed with the
Company's Form 8-K, dated February 13, 1995).
2.3 Asset Purchase Agreement By and Between Capitol Multimedia, Inc. (as
"Seller") and Philips Media, Inc. (as "Purchaser") dated August 11,
1995 (incorporated by reference herein to the exhibit filed with the
Company's Form 8-K, dated August 11, 1995).
2.4 Capitol Multimedia, Inc. - CSTI Promissory Notes dated March 31, 1997
(incorporated by reference herein to the exhibits filed with the
Company's Form 8-K, dated April 11, 1997
2.5 Agreement for the Acquisition of the Outstanding Stock of CSTI by and
between the Company and the Selling Shareholders of CSTI dated March
31, 1997 (incorporated by reference herein to the exhibits filed with
the Company's Form 8-K dated, April 11, 1997).
2.6 Asset and Stock Purchase Agreement between Davidson & Associates, Inc.
and Capitol Multimedia, Inc. (incorporated herein to the exhibit filed
with the Company's Form 8-K, dated April 24, 1997).
2.7 Acquisition Agreement By and Between Celerity Solutions, Inc. ( as
`Buyer") and Somerset Automation, Inc. ( as "Seller") dated Deecember
8, 1997 (incorporated herein to the exhibit filed with the Company's
Form 8-K, filed December 23, 1997).
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).
4.1 Specimen of Stock Certificate-Common stock
4.2 Specimen of Series A Warrant
4.3 Form of Underwriter Warrant (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).
46
<PAGE>
Exhibit
Number Exhibit Name
4.4 Form of Warrant Agreement with Warrant Agent (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).
4.5 Amended and Restated 1991 Non-Qualified Capitol Multimedia, 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 September 2, 1997, filed on
September 5, 1997).
4.7 First Amendment to the Warrant Agreement Between Capitol Multimedia,
Inc. and North American Transfer Co. (incorporated by reference herein
to the exhibit filed with the Company's Form 8-K, dated February 26,
1996).
4.8 First Amendment to the Registration Rights Agreement Dated February
13, 1995 (incorporated by reference herein to the exhibit filed with
the Company's Form 8-K, dated February 26, 1996).
9.1 Voting Trust Agreement-Noble Investment Co. of Palm Beach
(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).
10.33 Asset Purchase Agreement By And Between Henninger Video, Inc. and
Capitol Multimedia, Inc., June 22, 1993--excluding exhibits and
schedules (incorporated by reference herein to the exhibit filed with
the Company's Form 8-K, dated June 30, 1993).
10.44 Employment Agreement between Capitol Multimedia, Inc. and Igor Razboff
(contained in Exhibit 2.1).
10.45 Employment Agreement between Capitol Multimedia, Inc. and Dale
DeSharone (contained in Exhibit 2.1).
10.46 Employment Agreement between Capitol Multimedia, Inc. and Luda
Kopeikina (incorporated by reference herein to the exhibits filed with
the Company's Form 8-K, dated November 14, 1996).
10.49 First Amendment to Employment Agreement between Capitol Multimedia,
Inc. and Igor Razboff, dated December 12, 1996 (incorporated by
reference herein to the exhibits filed with the Company's Form 8-K,
dated December 13, 1996).
47
<PAGE>
Exhibit
Number Exhibit Name
10.50 Employment Agreement between Capitol Multimedia, Inc. and Edward
Terino, dated November 30, 1996 (incorporated by reference herein to
the exhibits filed with the Company's Form 8-K, dated December 13,
1996).
10.52 Severance Agreement with Igor Razboff dated April 25,1997(
incorporated by reference herein to the exhibits filed with the
Company's Form 10QSB for the Quarter ended June 30, 1997 , filed
August 13,1997).
10.53 Severance Agreement with Dale Desharone dated April 17, 1997 (
incorporated by reference herein to the exhibits filed with the
Company's Form 10QSB for the Quarter ended June 30, 1997 , filed
August 13,1997)
10.54 Licencing and Distribution Agreement with Davidson & Associates, Inc.
( incorporated by reference herein to the exhibits filed with the
Company's Form 10QSB for the Quarter ended June 30, 1997 , filed
August 13,1997).
10.55 Software Publishing and Licensing Agreement with Broderbund Software,
Inc. ( incorporated by reference herein to the exhibits filed with the
Company's Form 10QSB for the Quarter ended June 30, 1997 , filed
August 13,1997).
21.1 List of Celerity Solutions, Inc. Subsidiaries
23.1 Consent of Independent Auditors.
24.1 Powers of Attorney (contained on signature page hereof).
27.1 Financial Data Schedule.
99.1 Form of Indemnification Agreement as signed by directors and officers
of the Company (incorporated by reference herein to the exhibit filed
with the Company's Form 10-QSB, dated June 30, 1993).
99.11 Press Release " Celerity Solutions inc. acquired Somerset Automation,
Inc." dated December 8, 1997 (incorporated by reference herein to the
exhibit filed with the Company's Form 8-K, filed December 10, 1997).
99.14 Press Release "Capitol Multimedia, Inc. Acquires Client Server
Technologies, Inc., dated March 31, 1997 (incorporated by reference
herein to the exhibit filed with the Company's Form 8-K, dated April
11, 1997).
99.15 Press Release "Capitol Multimedia, Inc. Announces Extension of Series
A Warrants", dated March 3, 1997 (incorporated by reference herein to
the exhibits filed with the Company's Form 8-K, dated April 11, 1997).
99.16 Press Release "Capitol Multimedia, Inc. Sells Selected Multimedia
Assets to Davidson & Associates, Inc., a division of CUC
International, Inc. (incorporated by reference herein to the exhibits
filed with the Company's Form 8-K, dated April 24, 1997).
48
053525
================================================================================
[LOGO] CELERITY SOLUTIONS
------ ------
NUMBER SHARES
------ ------
CS
------ ------
CELERITY SOLUTIONS, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
COMMON STOCK CUSIP 15100P 10 1
SEE REVERSE FOR CERTAIN DEFINITIONS
- --------------------------------------------------------------------------------
This Certifies that
is the owner of
- --------------------------------------------------------------------------------
CERTIFICATE OF STOCK
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK, PAR VALUE $.10 EACH OF
CELERITY SOLUTIONS, INC. transferable on the books of the Corporation by the
holder hereof, in person or by duly authorized attorney, upon surrender of this
certificate properly endorsed. This certificate is not valid until countersigned
and registered by the Transfer Agent and Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile of its duly
authorized officers.
Dated:
[SEAL OF CELERITY SOLUTIONS, INC.]
/s/ Edward Terino /s/ [ILLEGIBLE]
Chief Financial Officer Chief Executive Officer
COUNTERSIGNED AND REGISTERED:
AMERICAN STOCK TRANSFER & TRUST COMPANY
(NEW YORK, N.Y.)
TRANSFER AGENT AND REGISTRAR
BY
AUTHORIZED SIGNATURE
(C) SECURITY-COLUMBIAN UNITED STATES BANKNOTE COMPANY 1960
================================================================================
<PAGE>
The Corporation will furnish to any shareholder upon request and without
charge a full statement of the designations, preferences, limitations, and
relative rights of the shares of the Common Stock and the Preferred Stock, the
variations in the relative rights and preferences between the shares of each
series of the Preferred Stock so far as the same may have been fixed and
determined, and the authority of the board of directors to fix and determine the
relative rights and preferences of subsequent series.
----------
KEEP THIS CERTIFICATE IN A SAFE PLACE. IF IT IS LOST, STOLEN OR DESTROYED
THE CORPORATION WILL REQUIRE A BOND OF INDEMNITY AS A CONDITION TO THE ISSUANCE
OF A REPLACEMENT CERTIFICATE.
----------
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to the applicable laws or regulations:
TEN COM - as tenants in common
TEN ENT - as tenants by the entireties
JT TEN - as joint tenants with the right of survivorship and not as
tenants in common
UNIF TRANS MIN ACT - _________ Custodian _________ under Uniform Transfers
(Cust) (Minor)
to Minors Act _________
(State)
Additional abbreviations may also be used though not in the above list.
For value received, _____________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
______________________________________
______________________________________
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
________________________________________________________________________________
_________________________________________________________________________ shares
of the capital stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint ____________________________________ Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated ___________________________
__________________________________________________
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND
WITH THE NAME AS WRITTEN UPON THE FACE OF THE
CERTIFICATE IN EVERY PARTICULAR, WITHOUT
ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.
SIGNATURE(S) GUARANTEED: __________________________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN
ELIGIBLE GUARANTOR INSTITUTION (BANKS,
STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND
CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED
SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT
TO S.E.C. RULE 17Ad-15.
053525
================================================================================
[LOGO] CELERITY SOLUTIONS
No. CSW REDEEMABLE SERIES A WARRANT
(Incorporated Under the Laws of the State of Delaware)
REDEEMABLE SERIES A WARRANT TO PURCHASE
______ SHARES OF COMMON STOCK
VOID AFTER 5:00 P.M. EASTERN STANDARD TIME ON MARCH 31, 1998
CUSIP 15100P 11 9
FOR VALUE RECEIVED, Celerity Solutions, Inc. (the "Company"), a Delaware
corporation, hereby certifies that
, the registered holder hereof, or registered assignee (the "Holder") is
entitled, subject to the terms and conditions hereinafter set forth, to purchase
from the Company, at any time on or after April 1, 1993, and on or before 5:00
p.m., Eastern Standard Time on March 31, 1998, the above mentioned share(s) of
fully paid and non-assessable Common Stock, $.10 par value of the Company (the
"Common Stock") indicated above by surrendering this Warrant Certificate with
the purchase form hereof duly executed on any business day at the principal
office of American Stock Transfer & Trust Company, 40 Wall Street, New York, NY
10005 or its successor, as Warrant Agent (the "Warrant Agent") and upon payment
therefor of the purchase price in lawful money of the United States of America
to the order of the Warrant Agent of $6.25 per whole share (the "Warrant
Price").
This Warrant Certificate is issued under and in accordance with the Warrant
Agreement dated as of April 1, 1992, between the Company and the Warrant Agent
and is subject to the terms and provisions contained in said Warrant Agreement,
to all of which terms and provisions the Holder of this Warrant Certificate
consents to by acceptance hereof. Copies of said Warrant Agreement are on file
at the principal office of the Warrant Agent, American Stock Transfer & Trust
Company, 40 Wall Street, New York, NY 10005.
This Warrant Certificate, with or without other Warrant Certificates, upon
surrender at the principal office of the Warrant Agent, may be exchanged for
another Warrant Certificate or Certificates entitling the Holder to purchase a
like number of whole shares of Common Stock as the Warrant Certificate or
Warrant Certificates surrendered entitled the Holder to purchase. Upon any
partial exercise of this Warrant Certificate, there shall be issued to the
Holder a new Warrant Certificate in respect to the number of shares and Warrants
as to which this Warrant Certificate was not exercised.
The Company shall not be required to issue fractions of shares on the
exercise of Warrants but shall pay cash equal to the fair market value thereof
as determined by the Board of Directors in respect to such fractions of Common
Shares.
No Holder of this Warrant Certificate shall be entitled to vote or receive
dividends or be deemed the holder of Common Stock or any other securities of the
Company which may at any time be issuable upon exercise hereof for any purpose,
nor shall anything contained in the Warrant Agreement or herein be construed to
confer upon the Holder hereof, as such, any of the rights of a stockholder of
the Company or any right to vote for the election of directors or upon any
matter submitted to stockholders at any meeting thereof, or to give or withhold
consent to any corporate action (whether upon any recapitalization, issue of
stock, reclassification of stock, change of par value or change of stock to no
par value, consolidation, merger, conveyance or otherwise) or to receive notice
of meetings or subscription rights or otherwise, until the Warrants evidenced by
this Warrant Certificate shall have been exercised and the Common Stock
purchasable upon exercise thereof shall become deliverable as provided in the
Warrant Agreement.
Every Holder of this Warrant Certificate, by accepting the same, consents
and agrees with the Company, the Warrant Agent and with every other Holder of a
Warrant Certificate that:
(a) This Warrant Certificate is transferable only by the registered
Holder hereof in person or by attorney duly authorized in writing and only
at the principal office of the Warrant Agent duly endorsed, or accompanied
by a proper instrument of transfer satisfactory to the Warrant Agent and
the Company in their sole discretion; and
(b) The Company and the Warrant Agent may deem and treat the person in
whose name this Warrant Certificate is registered as the absolute owner for
all purposes whatsoever, and neither the Company nor the Warrant Agent
shall be affected by any notice to the contrary.
This Warrant Certificate shall not be valid or obligatory for any purpose
until it shall have been countersigned by the Warrant Agent.
Commencing July 1, 1993 (fifteen (15) months from the Effective Date of the
Registration Statement) in the event that the Market Price as defined in the
Warrant Agreement for the Company's Common Stock exceeds the Warrant exercise
price by 10%, adjusted as provided in Section 12 of the Warrant Agreement, for a
period of twenty consecutive business days, the Company shall have the option to
redeem the Warrants on an all or none basis at a redemption price of $.01 per
Warrant, upon 30 days written notice. The Warrants may be exercised anytime
prior to the expiration of the 30-day redemption notice period. Thereafter the
Warrants are subject to redemption.
WITNESS the facsimile seal of the Company and the facsimile signatures of
its duly authorized officers.
Dated:
CELERITY SOLUTIONS, INC.
Attest: By:
By:
/s/ EDWARD TERINO /s/ ILLEGIBLE
Chief Financial Officer Chief Executive Officer
Countersigned:
AMERICAN STOCK TRANSFER & TRUST COMPANY
(New York, NY)
Warrant Agent
By
Authorized Signature
[SEAL OF CELERITY SOLUTIONS, INC.]
================================================================================
<PAGE>
SUMMARY OF TERMS OF WARRANT CERTIFICATES
1. WARRANT AGREEMENT. This Warrant Certificate is issued under and in
accordance with the Warrant Agreement, dated as of April 1, 1992, between the
Company and Warrant Agent and is subject to the terms and provisions contained
in said Warrant Agreement, to all of which terms and provisions the Holder of
this Warrant Certificate consents by acceptance hereof. Copies of said Warrant
Agreement are on file at the office of the Warrant Agent, American Stock
Transfer & Trust Company, 40 Wall Street, New York, NY 10005.
2. EXERCISE OF WARRANT. Upon surrender of this Warrant Certificate, with
the Warrant Exercise Form duly executed, together with the full purchase price
payable to the order of the Warrant Agent for each Share of Common Stock of the
Company as to which this Warrant Certificate is exercised, together with the
amount of any applicable taxes, the Holder hereof shall be entitled to receive a
certificate or certificates for the number of fully paid and non-assessable full
shares of Common Stock purchased pursuant to this Warrant Certificate,
registered in such name or names as may be directed by the Holder, and there
shall be delivered to the Holder a new Warrant Certificate or Certificates
representing the unexercised portion of this Warrant Certificate. Each person in
whose name any certificates for shares of Common Stock is issued shall, for all
purposes, be deemed to have become the holder of record of such shares on the
date on which the Warrant Certificate was surrendered and any payment of the
purchase price and of any applicable taxes was made, irrespective of the date of
delivery of such certificates, except that, if the date of such surrender and
payment is a date when the stock transfer books of the Company are closed, such
person shall be deemed to have become the holder of such shares at the close of
business of the next succeeding date on which the stock transfer books are open
as further elaborated in the Warrant Agreement.
3. ADJUSTMENTS OR NUMBER OF SHARES PURCHASABLE. Subject to the provisions
of Section 5 hereof:
(a) The Warrant Exercise Price and Redemption Price shall be subject to
adjustment as follows:
(i) If the Company shall prior to the exercise of this Warrant
Certificate, issue any Additional Stock (as hereinafter defined in
subsection 3(a)(ix) without consideration or for a consideration per share
less than the Warrant Price in effect immediately prior to the issuance of
such Additional Stock, then the Warrant Price in effect immediately prior
to the issuance of such Additional Stock shall immediately (except as
provided in subsection 3(a)(ix) be reduced to the price (computed to the
nearest cent) determined by dividing (A) an amount equal to the sum of (i)
the product obtained by multiplying the Warrant Price in effect immediately
prior to the issuance of such Additional Stock by the number of shares of
Common Stock outstanding immediately prior to the issuance of such
Additional Stock and (ii) the aggregate consideration received by the
Company for such Additional Stock, by (B) an amount equal to the sum of (i)
the number of shares of Common Stock outstanding immediately prior to the
issuance of such Additional Stock and (ii) the number of shares of such
Additional Stock.
(ii) For the purpose of any adjustment of the Warrant Price pursuant
to this Section 3, the following provisions shall be applicable.
(A) If the Company shall, prior to the exercise of this Warrant
Certificate, issue any Additional Stock for cash, the consideration
received by the Company therefor shall be deemed to be the amount of
cash received by the Company for such Additional Stock before
deducting therefrom the amount of any commission, discount or other
expenses which may have been paid or incurred by the Company for any
underwriting of, or otherwise in connection with the issuance or sale
of, such Additional Stock.
(B) If the Company shall, prior to the exercise of this Warrant
Certificate, issue Additional Stock as a dividend upon Common Stock or
in payment of a dividend thereon, the Company shall be deemed to have
issued such Additional Stock without consideration, and such
Additional Stock shall be deemed to have been issued and to be
outstanding at the close of business on the record date for the
determination of stockholders entitled to receive the same.
(C) If the Company shall, prior to the exercise of this Warrant
Certificate, issue Additional Stock in payment or satisfaction of any
dividend on any class of stock of the Company other than Common Stock,
the amount of the consideration received by the Company for such
Additional Shares shall be deemed to be the amount of the obligation
in respect of dividends that shall be discharged by the issuance of
such Additional Stock.
(D) If the Company shall, prior to the exercise of this Warrant
Certificate, issue Additional Stock in exchange for outstanding shares
of stock of any other class, or for other securities, of the Company,
the amount of the consideration received by the Company for such
Additional Stock shall be deemed to be the Market Price (as
hereinafter defined in subsection 3(a)(x) for the shares of Additional
Stock so issued, determined as of the date upon which the issuance of
such Additional Stock shall have been authorized.
(E) If the Company shall, prior to the exercise of this Warrant
Certificate, issue (otherwise than as a dividend or other distribution
on any stock of the Company or upon conversion or exchange of other
securities of the Company) Additional Stock for a consideration part
or all of which shall be other than cash, the amount of the
consideration therefor other than cash shall be deemed to be the value
of such consideration as determined by a resolution of the Board of
Directors of the Company irrespective of the accounting treatment
thereof. The reclassification of securities other than Common Stock
into securities including Common Stock into securities including
Common Stock shall be deemed to involve the issuance for a
consideration other than cash of such Common Stock immediately prior
to the close of business on the date fixed for the determination of
Shareholders entitled to receive such Common Stock.
(F) If the Company shall, prior to the exercise of this Warrant
Certificate, issue Additional Stock upon the conversion of any
obligations of the Company that shall be convertible into Common
Stock, the amount of the consideration received by the Company for
such Additional Stock shall be deemed to be the principal amount of
such obligations so converted into such Additional Stock plus the
amount of cash, if any, required to be paid to the Company in
connection with the conversion of such obligations other than by way
of adjustment of interest and dividends.
(G) If the Company shall, prior to the exercise of this Warrant
Certificate, issue Additional Stock upon the conversion of any
obligations of the Company that shall be convertible into Common
Stock, the amount of the consideration received by the Company for
such Additional Stock shall be deemed to be the amount of the
consideration received by the Company for the obligations so converted
plus the amount of cash, if any, required to be paid to the Company in
connection with the conversion of such obligations other than by way
of adjustment of dividends. For purpose of this subsection, the amount
of the consideration received by the Company for the obligations so
converted shall be computed in like manner to that provided in
subsections (A), (B), (C), (D) and (E) above, as appropriate.
(H) In the case of the issuance of Additional Stock upon exercise
of any rights or options to subscribe for or to purchase Additional
Stock, prior to the exercise of this Warrant Certificate, the amount
of the consideration received by the Company for such Additional Stock
shall be deemed to be the amount of consideration received by the
Company for the rights or options so exercised plus the amount of
consideration, if any, required to be paid to the Company in
connection with the exercise of such rights or options.
(I) Neither the purchase or other acquisition by the Company of
any Common Stock shall effect any adjustment of the Warrant Price or
be taken into account in computing any subsequent adjustment of the
Warrant Price. Shares of Common Stock at any time held in the treasury
of the Company shall not be deemed to be outstanding at that time for
the purpose hereof.
(iii) In case the Company shall prior to the exercise of this Warrant
Certificate subdivide or combine its outstanding shares of Common Stock, by
reclassification or otherwise, the Warrant Price then in effect shall be
proportionately decreased or increased, as the case may be, effective
immediately after the effective date of such subdivision or combination.
(iv) If any capital reorganization or reclassification of the capital
stock of the Company, or consolidation or merger of the Company with
another corporation, or sale of all or substantially all of its assets to
another corporation shall be effected prior to the exercise of this Warrant
Certificate, then, as a condition of such reorganization, reclassification,
consolidation, merger or sale, lawful and adequate provision shall be made
whereby the holder of each Warrant shall thereafter have the right to
purchase and receive upon the basis and upon the terms and conditions
specified in the Warrant Agreement and in lieu of the shares of the Common
Stock of the Company immediately theretofore purchasable and receivable
upon the exercise of the rights represented by such Warrant, such shares of
stock, securities or assets as may be issued or payable with respect to or
in exchange for a number of shares of such Common Stock immediately
theretofore purchasable and receivable upon the exercise of the rights
represented by such Warrant, such shares of stock, securities or assets as
may be issued or payable with respect to or in exchange for a number of
shares of such Common Stock immediately theretofore purchasable and
receivable upon the exercise of such rights represented by such Warrant had
such reorganization, reclassification, consolidation, merger or sale not
taken place, and in any such case appropriate provisions shall be made with
respect to the rights and interest of the holders of the Warrants to the
end that the provisions of this Agreement (including, without limitation,
provisions for adjustment of the Warrant Price and of the number of shares
issuable upon the exercise of Warrants) shall thereafter be applicable as
nearly as may be in relation to any shares of stock, securities, or assets
thereafter deliverable upon exercise of Warrants. The Company shall not
effect any such consolidation, merger or sale, unless prior to or
simultaneously with the consummation thereof, the successor corporation (if
other than the Company) resulting from such consolidation or merger or the
corporation purchasing such assets shall assume, by written instrument
executed and delivered to the Warrant Agent, the obligation to deliver to
the holder of each Warrant such shares of stock, securities or assets as,
in accordance with the foregoing provisions, such holders may be entitled
to purchase.
(v) If, prior to the exercise of this Warrant Certificate, any
Additional Stock or Convertible Securities (as defined in subsection
3(a)(vi)(A) shall be issued in connection with any merger or consolidation
in which the Company is the surviving corporation (other than any
consolidation or merger in which the previously outstanding shares of
Common Stock of the Company shall be changed into or exchanged for the
stock or other securities of another corporation) the amount of
consideration therefor shall be deemed to be the fair value as determined
reasonably and in good faith by the Board of Directors of the Company of
such portion of the assets and business of the non-surviving corporation as
such Board may determine to be attributable to such shares of Common Stock
or Convertible Securities, as the case may be.
(vi) If the Company shall, prior to the exercise of the Warrant
Certificate, in any manner (whether directly or by assumption in a merger
or otherwise):
(A) grant any rights or options to subscribe for or to purchase
Additional Stock or any stock or securities convertible into or
exchangeable for Additional Stock (such convertible or exchangeable
stock or securities being herein called "Convertible Securities")
whether or not such rights or options or the right to convert or
exchange any such COnvertible Securities are immediately exercisable,
and the price per share for which Additional Stock is issuable upon
the exercise of such rights or options or upon conversion or exchange
of such Convertible Securities (determined by dividing (i) the total
amount, if any, received or receivable by the Company as consideration
for the granting of such rights or options, plus the minimum aggregate
amount of additional consideration payable to the Company upon the
exercise of all such rights or options, plus, in the case of such
rights or options which relate to Convertible Securities, the minimum
aggregate amount of additional consideration, if any, payable upon the
issue or sale of such Convertible Securities and upon the conversion
or exchange thereof, by (ii) the total maximum number of shares of
Additional Stock issuable upon the exercise of such rights or options
or upon the conversion or exchange of all such Convertible Securities
issuable upon the exercise of such rights or options) shall be less
than the Warrant price in effect immediately prior to the time of the
granting of such rights or options, then the total maximum number of
shares of Additional Stock issuable upon the exercise of such rights
or options or upon conversion or exchange of the total minimum amount
of such Convertible Securities issuable upon the exercise of such
rights or options shall (as of the date of granting of such rights or
options) be deemed to be outstanding and to have been issued for such
price per share. Except as otherwise provided in subsection
3(a)(viii), no adjustment of the Warrant Price shall be made upon the
actual issue of Additional Stock or of Convertible Securities upon
exercise of any rights or options to subscribe for or to purchase
Additional Stock or Convertible Securities or upon the actual issue of
Additional Stock upon conversion or exchange of any Convertible
Securities; or
(B) sell any Covertible Securities, whether or not the rights to
exchange or convert thereunder are immediately exercisable, and the
price per share for which Additional Stock is issuable upon such
conversion or exchange (determined by dividing (i) the total amount
received or receivable by the Company as consideration for the issue
or sale of such Convertible Securities, plus the minimum aggregate
amount of additional consideration, if any, payable to the Company
upon the conversion or exchange thereof, by (ii) the total maximum
number of shares of Additional Stock issuable upon the conversion or
exchange of all such Convertible Securities) shall be less than the
Warrant Price in effect immediately prior to the time of such issue
or sale, then the total maximum number of shares of Additional Stock
issuable upon conversion or exchange of all such Convertible
Securities shall (as of the date of the issue of such Convertible
Securities) be deemed to be outstanding and to have been issued for
such price per share, provided that if any such issue or sale of such
Convertible Securities is made upon exercise of any rights to
subscribe for or to purchase or any option to purchase any such
Convertible Securities for which adjustments of the Warrant Price have
been or are to be made pursuant to other provisions of this subsection
3(a), no further adjustment of the Warrant Price shall be made by
reason of such issue or sale. Except as otherwise provided in
subsection 3(a)(vii), no adjustment of the Warrant Price shall be made
upon the actual issue of Additional Stock upon conversion or exchange
of Convertible Securities.
(vii) Upon the happening of any of the following events, namely, if,
prior to the exercise of this Warrant Certificate, (A) the purchase price
provided for in any right or option granted by the Company to subscribe for
or to purchase Additional Stock or Convertible Securities, (B) the
additional consideration, if any, payable upon the conversion or exhcange
of any Convertible Securities or (C) the rate at which any Convertible
Securities are convertible into or exchangeable for Additional Stock shall
change in any manner and at any time (other than under or by reason of
provisions designed to protect against dilution), the Warrant Price in
effect at the time of such event shall forthwith be adjusted or readjusted
to the Warrant Price which would have been in effect at such time had such
rights, options or Convertible Securities still outstanding provided for
such changed purchase price, additional consideration or rate of conversion
or exchange, as the case may be, at the time initially granted, issued or
sold. On the expiration of any option or right granted by the Company to
subscribe for or to purchase Additional Stock or Convertible Securities or
the termination of any right to convert or exchange such Convertible
Securities, the Warrant Price then in effect hereunder shall forthwith be
adjusted to the Warrant Price which would have been in effect at the time
of such expiration or termination had such right, option or Convertible
Securities, to the extent outstanding immediately prior to such expiration
or termination, never been issued, and the Additional Stock issuable
thereunder shall no longer be deemed to be outstanding. If the purchase
price provided for in any such right or option to subscribe for or to
purchase Additional Stock or the rate at which any such Convertible
Securities are convertible into or exchangeable for Additional Stock or the
additional consideration payable upon the exchange or conversion of such
Convertible Securities into Additional Stock shall be reduced at any time
under or by reason or provisions with respect thereto designed to protect
against dilution, then in case of the delivery of Additional Stock upon the
exercise of any such right or option or upon conversion or exchange of any
such Convertible Securities, the Warrant Price then in effect hereunder
shall forthwith be adjusted to such respective amount as would have been
obtained had such right, option or Convertible Securities never been issued
as to such Additional Stock, and the Additional Stock or upon conversion or
exchange of Convertible Securities at the price paid therefor, but only if
as a result of such adjustment the Warrant Price then in effect hereunder
is thereby reduced.
(viii) Anything is this Section 3 to the contrary notwithstanding,
the Company shall not be required, except as hereinafter provided, to make
any adjustment of the Warrant Price in any case in which the amount by
which such Warrant Price would be reduced in accordance with the foregoing
provisions would be less than $.10, but in such case any adjustment that
would otherwise be required than to be made will be carried forward and
made at the time and togehter with the next subsequent adjustment which,
together with any and all such adjustments so carried forward, shall amount
to not less than $.10. In the event of any subdivision or combination of
shares of Common Stock said amount (as theretofore decresed or increased)
shall be proportionately decreased or increased.
(ix) "Additional Stock" shall mean any Common Stock issued after the
date hereof, other than:
(A) Common Stock issued upon exercise of Warrants;
(B) Common Stock issued upon exercise of warrants or options
granted or identified to be granted by the Company (including all
stock option plans) on or prior to the date hereof;
(x) "Market Price" shall mean the average of the closing bid price of
the Common Stock on all domestic exchanges on which the Common Stock may at
the time be listed or admitted to trading, or, if the Common Stock shall
not be so listed or admitted to trading, the average of the closing bid
price at the end of the day in the domestic over-the-counter market, in
each such case averaged over a period of 20 consecutive business days prior
to the date as of which Market Price is being determined; provided that if
the Common Stock is listed on any domestic exchange, the term "business
days" as used in this sentence shall mean business days on which such
exchange is open for trading. If the Common Stock is neither listed or
admitted to trading on any domestic exchange nor quoted in the domestic
over-the-counter market, the Market Price shall mean the average of the
closing bid price as furnished by any dealer in securities dealing in the
Common Stock.
(b) Upon each adjustment of the Warrent Price pursuant to subsection 3(a)
hereof, the number of shares of Common Stock specified in each Warrant
Certificate shall thereupon evidence the right to purchase that number of shares
of Common Stock (calculated to the nearest hundredth of a share of Common Stock)
obtained by multiplying the Warrant Price in effect immediately prior to such
adjustment by the number of shares of Common Stock purchasable immediately prior
to such adjustment upon exercise of such Warrant and dividing the product so
obtained by the Warrant Price in effect after such adjustment.
(c) Irrespective of any adjustments of the Warrants Price or the number or
kind of securities issuable upon exercise of Warrants, Warrant Certificates
theretofore or thereafter issued may continue to express the same Warrant Price
and number of shares of Common Stock as are stated in similar Warrant
Certificates previously issued.
(d) The Company may retain the independent public accounting firm regularly
retained by the Company, or another firm of independent public accountants
selected by the Company's Board of Directors and approved by the Warrant Agent,
to make any computation required under this Section 3, and a certificate signed
by such firm shall be conclusive evidence of any computation made under this
Section 3.
(e) Whenever there is an adjustment in the Warrant Price or in the number
or kind of securities issuable upon exercise of the Warrants, or both, as
provided in this Section 3, the Company shall promptly file with the Warrant
Agent (i) a certificate signed by the Chairman of the Board or the President or
a Vice President of the Company and by the Treasurer or an Assistant Treasurer
or the Secretary or an Assistant Secretary of the Company, showing in detail the
facts requiring such adjustment and the number and kind of securities issuable
upon exercise of each Warrant after such adjustment; and (ii) a notice stating
that such adjustment has been effected and stating the Warrant Price then in
effect and the number and kind of securities issuable upon exercise of each
Warrant. The Warrant Agent shall cause such notice to be sent to each registered
holder of a Warrant. The Warrant Agent shall have no duty with respect to any
certificate filed with it except to keep the same on file and available for
inspection by holders of Warrants during reasonable business hours. The Warrant
Agent shall not be under any duty or responsibility to any holder of a Warrant
to determine whether any facts exist which may require any adjustment of the
Warrant Price or the number or kind of securities issuable upon the exercise of
Warrants, or with respect to the nature or extent of any such adjustment when
made, or with respect to the method employed in making any such adjustment.
(f) The Warrant Price and the number of shares issuable upon exercise of a
Warrant shall not be adjusted except in the manner and only upon the occurrence
of the events heretofore specifically referred to in this Section 3.
4. NOTICE TO WARRANT HOLDERS OF CERTAIN EVENTS. If, at any time prior to
the exercise of this Warrant Certificate, any of the following events shall
occur:
(a) the Company shall pay any dividends payable in stock upon its Common
Stock or make any distribution (other than regular cash dividends) including any
distributions of assets as a liquidating or partial liquidating dividend to the
holders of its Common Stock;
(b) the Company shall offer for subscription pro rata to the holders of its
Common Stock any additional shares of stock of any class or other rights;
(c) there shall be any capital reorganization or any stock split, stock
distribution, combination or reclassification of the capital stock of the
Corporation, or any consolidation or merger of the Corporation with, or sale of
all or substantially all of its assets to, another corporation; or
(d) there shall be a voluntary or involuntary dissolution, liquidation or
winding-up of the Company;
then in any one or more of said events, the Company shall give notice of such
event by registered mail to the last registered Holder hereof as the name and
address of such Holder shall appear on the books of the Company maintained by
the Warrant Agent, at least thirty (30) days prior to the date on which (i) the
books of the Company shall close, or a record date be fixed for the
determination of holders of Common Shares entitled to such dividend or
distribution or (ii) such reclassification, reorganization, consolidation,
merger or transfer shall be consummated, as the case may be. Such notices shall
specify the record date for the determination of the holders of Common Stcok
entitled to participate in such dividend or distribution or entitled to exchange
their shares of Common Stock for securities, or other property, deliverable upon
such reclassification, reoganization, consolidated, merger or transfer, as the
case my be, but the giving of such notice shall in no event abridge or limit the
rights of the Holder of this Warrant Certificate as provided in Section 4(a)
hereof.
5. WARRANT HOLDER HAS NO RIGHTS AS STOCKHOLDER. The Holder of this Warrant
Certicate shall not, by reason of the ownership or possession of the Warrant,
have any rights whatsoever as a stockholder of the Company or any rights
whatsoever except the rights stated in the Warrant Agreement and in this Warrant
Certificate.
In the Warrant Agreement and in this Warrant Certificate.
No provisions of this Warrant Certificate and no right or option granted or
conferred hereunder shall in any way limit, affect or abridge the exercise by
the Company of any of its corporate rights or powers to recapitalize, amend its
Articles of Incorporation, reorganize, consolidate, or merge within or into
another corporation, or to transfer all or any part of its property or assets,
or the exercise of any other of the corporate rights and powers of the Company.
6. RESERVATION OF SHARES. The Company shall at all times reserve and keep
available, out of its authorized and unissued shares of Common Stock, solely for
the purpose of providing for the exercise of the Warrants then outstanding and
in effect, such number of shares of Common Stock (or other stock substituted
therefor as hereinabove provided) as shall, from time to time, be sufficient for
such exercise of Warrants. The Company shall, from time to time, in accordance
with the laws of the State of Delaware, increase the authorized amounts of its
capital shares if at any time the number of shares of Common Stock (or other
shares substituted therefor as hereinabove provided) remaining unissued and
unreserved for other purposes, shall not be sufficient to permit the exercise of
all Warrants then outstanding and in effect. The Company shall at all times
cause to authorize and have available any other securities or property
deliverable upon the exercise of Warrants.
7. NOTICES. All notices required hereunder shall be in writing and shall be
deemed given when telegraphed, delivered peronally or within two (2) days after
mailing when mailed by certified or registered mail, return receipt requested:
if to the Holder, at the address of such Holder as shown on the registry books
maintained by the Warrant Agent; and (b) if to the Company, at 200 Baker Avenue,
Suite 300, Concord, MA 01742 or at such other address of which the Company or
Holder has been advised by notice hereunder.
8. APPLICABLE LAW. The Warrant is issued under and shall for all purposes
be goverened by and construed in accordance with the laws of the State of
Delaware with regard to principles of conflicts of laws.
<PAGE>
WARRANT EXERCISE FORM
To be Executed by the Registered Holder
In Order to Exercise Warrants
The undersigned Registered Holder hereby irrevocably elects to exercise
_____ Warrants represented by this Warrant Certificate, and to purchase the
securities issuable upon the exercise of such Warrants, and requests that
certificates for such securities shall be issued in the name of:
________________________________________________________________________________
(Name)
________________________________________________________________________________
(Address)
________________________________________________________________________________
(Please Insert Social Security or Other Identifying Number)
and be delivered to:
________________________________________________________________________________
(Name)
at______________________________________________________________________________
(Address)
and if such number of Warrants shall not be all the Warrants evidenced by this
Warrant Certificate, that a new Warrant Certificate or the balance of such
Warrants be registered in the name of, and delivered to, the Registered Holder
at the address stated below.
(The undersigned represents that the exercise of the within Warrant was
solicited by a member of the National Association of Securities Dealers, Inc. If
not solicited by a NASD member, please write "unsolicited" in the space below.
Unless otherwise indicated by listing the name of another NASD member firm, it
will be assumed that the exercise was solicited by
________________________________________________________________________________
_______________________________________________________
(Name of NASD Member if other than ____________________
Date:______________ _______________________________________________________
Signature
_______________________________________________________
_______________________________________________________
Address
_______________________________________________________
Taxpayer Identification No.
_______________________________________________________
Signature Guaranteed
ASSIGNMENT
To be Executed by the Registered Holder
In Order to Assign Warrants
FOR VALUE RECEIVED, _______________________________________________________
________________________________________________________________________________
(Name)
________________________________________________________________________________
(Address)
________________________________________________________________________________
(Please Insert Social Security or Other Identifying Number)
of the Warrants represented by this Warrant Certificate, and hereby irrevocably
constitutes and appoints
_______________________________________________________________________ Attorney
to transfer this Warrant Certificate on the books of the Company, with full
power of substitution.
Date:______________ _______________________________________________________
Signature Guaranteed
_______________________________________________________
The signature to the assignment or the subscription form must correspond to the
name as written upon the face of this Warrant Certificate in every particular,
without alteration or enlargement of any change whatsoever, and must be
guaranteed by a commercial bank or trust company or a member firm of the
American Stock Exchange or the National Association of Securities Dealers, Inc.
CELERITY SOLUTIONS, INC.
EXHIBIT 21.1
List of Capitol Multimedia, Inc. Subsidiaries
Name of Subsidiary State of Jurisdiction of Incorporation
- ------------------ --------------------------------------
Animation Magic, Inc. Delaware
Client Server Technologies, Inc. Massachusetts
"Paragon" LLC St. Petersburg, Russia
Somerset Solutions, Inc Delaware
CELERITY SOLUTIONS, INC.
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement Form
S-8 pertaining to the 1991 Non-Qualified Employee Stock Option Plan and the 1992
Non-Qualified, Non-Employee Director Stock Option Plan of Celerity Solutions,
Inc. of our report dated May 14, 1998, with respect to the consolidated
financial statements of Celerity Solutions, Inc. included in the Annual Report
(Form 10-KSB) for the year ended March 31, 1998.
ERNST & YOUNG LLP
Boston, Massachusetts
June 25, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE CONSOLIDATED
BALANCE SHEET AT MARCH 31, 1998 AND THE CONSOLIDATED STATEMENTS OF
OPERATIONS FOR THE YEAR ENDED MARCH 31, 1998 FOUND ON PAGES 23 TO 27 OF THE
COMPANY'S FORM 10KSB AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 1,347,246
<SECURITIES> 994,384
<RECEIVABLES> 2,359,354
<ALLOWANCES> 158,600
<INVENTORY> 0
<CURRENT-ASSETS> 5,811,926
<PP&E> 1,266,250
<DEPRECIATION> 697,577
<TOTAL-ASSETS> 8,445,642
<CURRENT-LIABILITIES> 3,390,764
<BONDS> 0
0
0
<COMMON> 884,289
<OTHER-SE> 2,921,850
<TOTAL-LIABILITY-AND-EQUITY> 8,445,642
<SALES> 6,178,313
<TOTAL-REVENUES> 6,178,313
<CGS> 98,847
<TOTAL-COSTS> 3,399,775
<OTHER-EXPENSES> 6,603,624
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 206,245
<INCOME-PRETAX> (1,852,515)
<INCOME-TAX> 142,500
<INCOME-CONTINUING> (1,995,015)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,995,015)
<EPS-PRIMARY> (.30)
<EPS-DILUTED> (.30)
</TABLE>
