U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
[ ] Transition Report Under Section 13 or 15(d) of the
Exchange Act
For the transition period from to
Commission file number: 0-20102
CELERITY SOLUTIONS, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 52-1283993
- ----------------------------------- -------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation)
200 Baker Avenue, Suite 300
Concord, MA 01742
(Address of principal executive office)
(978) 287-5888
Issuer's telephone number
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes _X_ No __
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date:
Number Outstanding Shares
Title of Class as of July 13, 1998
-------------- -------------------
Common Stock, $.10 Par Value 8,017,798
Transitional Small Business Disclosure Format: Yes ___ No _X_
Exhibit Index on Page 18
Page 1 of 19
<PAGE>
CELERITY SOLUTIONS, INC.
JUNE 30, 1998
FORM 10-QSB
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets as of June 30, 1998
and March 31,1998 3
Condensed Consolidated Statement of Operations for the
three months ended June 30, 1998 and 1997 5
Condensed Consolidated Statements of Cash Flows for the
three months ended June 30, 1998 and 1997 6
Notes to Condensed Consolidated Financial Statements 7
ITEM 2. Management's Discussion and Analysis or Plan of
Operation 11
PART II OTHER INFORMATION
ITEM 1. Legal Proceedings 18
ITEM 2. Changes in Securities 18
ITEM 3. Defaults Upon Senior Securities 18
ITEM 4. Submission of Matters to a Vote of Security Holders 18
ITEM 5. Other Information 18
ITEM 6. Exhibits and Reports on Form 8-K 18
Signatures 19
Page 2 of 19
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Celerity Solutions, Inc.
Condensed Consolidated Balance Sheet
<TABLE>
<CAPTION>
June 30 March 31
1998 1998
----------------------------
Assets (Unaudited)
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 920,259 $ 1,347,246
Short-term investments 711,314 994,384
Accounts receivable, net 2,940,335 2,200,754
Notes Receivable 1,203,500 1,159,893
Prepaid expenses and other current assets 120,795 109,649
-----------------------------
Total current assets 5,896,203 5,811,926
Property and equipment: 1,294,601 1,266,250
Less: accumulated depreciation and amortization (770,918) (697,577)
-----------------------------
523,683 568,673
Notes receivable from related parties 103,079 117,999
Capitalized software, net 760,621 803,887
Goodwill, net 1,099,329 1,134,100
Other long-term assets 9,057 9,057
-----------------------------
Total assets $ 8,391,972 $ 8,445,642
=============================
</TABLE>
See accompanying notes.
Page 3 of 19
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Celerity Solutions, Inc.
Condensed Consolidated Balance Sheet (continued)
<TABLE>
<CAPTION>
June 30 March 31
1998 1998
-----------------------------
(Unaudited)
Liabilities and shareholders' equity
Current liabilities:
<S> <C> <C>
Accounts payable and accrued liabilities $ 1,685,838 $ 1,287,750
Income taxes payable 462,378 507,577
Current portion of notes payable to related parties 1,096,737 1,100,797
Unearned revenue and other current liabilities 298,672 494,640
-----------------------------
Total current liabilities 3,543,625 3,390,764
Notes payable to related parties 1,078,260 1,178,051
Deferred rent 67,241 70,688
-----------------------------
Total liabilities 4,689,126 4,639,503
-----------------------------
Shareholders' equity:
Common stock, $.10 par value 884,289 884,289
Additional paid-in capital 18,900,290 18,900,290
Accumulated deficit (14,031,389) (13,928,096)
-----------------------------
5,753,190 5,856,483
Less treasury stock, at cost (2,050,344) (2,050,344)
-----------------------------
Total shareholders' equity 3,702,846 3,806,139
-----------------------------
Total liabilities and shareholders' equity $ 8,391,972 $ 8,445,642
=============================
</TABLE>
See accompanying notes.
Page 4 of 19
<PAGE>
Celerity Solutions, Inc.
Condensed Consolidated Statements of Operations
Three Months Ended
June 30
1998 1997
---------------------------
-----(Unaudited)-----
Revenue:
Services $ 1,933,570 $ 796,248
Software licenses 531,136 122,721
Hardware and other 914,671
---------------------------
Total revenue 3,379,377 918,969
Cost of sales
Services 1,398,234 524,897
Hardware and related 781,396
Amortization of capitalized software 43,266 10,000
---------------------------
Total cost of sales 2,222,896 534,897
---------------------------
Gross margin 1,156,481 384,072
Operating expenses:
Research and development 292,400 222,797
General and administrative 598,425 323,788
Sales and marketing 355,749 124,344
Amortization of goodwill 34,771 20,680
---------------------------
Total operating expenses 1,281,345 691,609
---------------------------
Operating loss (124,864) (307,537)
Other income (expense):
Interest and other income, net 65,444 68,797
Interest expense (63,877) (47,652)
Gain on sale of assets 2,037,104
---------------------------
Income (loss) before income taxes (123,297) 1,750,712
Income tax (expense) benefit 20,000 (77,000)
===========================
Net income (loss) $ (103,297) $ 1,673,712
===========================
Income (loss) Per Common Share:
Net income (loss) per share $ (.01) $ .28
===========================
Weighted average shares outstanding 8,017,798 6,032,065
===========================
Income (loss) Per Share-Assuming Dilution:
Net income (loss) per share $ (.01) $ .27
===========================
Weighted average shares outstanding 8,017,798 6,225,042
===========================
See accompanying notes.
Page 5 of 19
<PAGE>
CELERITY SOLUTIONS, INC.
Celerity Solutions, Inc.
Condensed Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Three Months Ended
June 30
1998 1997
------------------------------
-----(Unaudited)-----
<S> <C> <C>
Operating Activities
Net (loss) income $ (103,297) $ 1,673,712
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Depreciation of property and equipment 73,341 47,228
Amortization of goodwill and developed software 78,037 30,680
Gain on sale of assets (2,037,104)
Changes in assets and liabilities (net of effect from
disposition):
Accounts receivable (739,581) (52,749)
Prepaid expenses and other current assets (11,146) 2,581
Short-term notes receivable (43,607)
Long-term notes receivable and other assets 14,920 15,821
Accounts payable and accrued liabilities 395,590 (39,579)
Income taxes payable (45,199)
Other current liabilities (16,323)
Notes payable to related parties (99,791)
Unearned revenue and deferred rent (184,650) 93,588
---------------------------
Net cash (used in) provided by operating activities (681,706) (265,822)
Investing Activities
Proceeds from sale of assets 2,509,758
Capital expenditures (28,351) (36,745)
---------------------------
Net cash (used in) provided by investing activities (28,351) 2,473,013
Financing Activities
Purchases of short-term investments (16,930)
Proceeds from sales of short-term investments 300,000 398,621
---------------------------
Net cash provided by financing activities 283,070 398,621
---------------------------
Net (decrease) increase in cash and cash equivalents (426,987) 2,605,812
Cash and cash equivalents at beginning of period 1,347,246 760,065
---------------------------
Cash and cash equivalents at end of period $ 920,259 $ 3,365,877
===========================
</TABLE>
See accompanying notes.
Page 6 of 19
<PAGE>
CELERITY SOLUTIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. Statement of Information Provided
The accompanying unaudited condensed consolidated financial statements, which
are for interim periods, have been prepared in accordance with Form 10-QSB
instructions and do not include all disclosures provided in the annual
consolidated financial statements. These unaudited condensed consolidated
financial statements should be read in conjunction with the consolidated
financial statements and the footnotes thereto contained in the Annual Report on
Form 10-KSB for the year ended March 31, 1998 of Celerity Solutions, Inc. (the
"Company"), as filed with the Securities and Exchange Commission on June 29,
1998. These results have been determined on the basis of generally accepted
accounting principles and practices applied consistently with those used in the
preparation of the Company's March 31, 1998 Annual Report on Form 10-KSB. The
March 31, 1998 balance sheet was derived from audited consolidated financial
statements, but does not include all disclosures required by generally accepted
accounting principles.
2. Reclassifications
Certain amounts in the June 30, 1997 Statement of Operations and Statement of
Cash Flows have been reclassified to conform to the June 30, 1998 presentation.
3. Segment Reporting
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
No. 131, Disclosure about Segments of an Enterprise and Related Information,
which must be adopted for fiscal years beginning after December 15, 1997. This
statement need not be applied to interim financial statements in the initial
year of its application. Once this statement is adopted, comparative information
for previous years is required to be restated to comply with the reporting
requirements of FASB No. 131. The Company has not yet adopted this statement.
When adopted, it will affect only the presentation of financial information and
will not impact the financial results.
4. Income (loss) Per Share
In February 1997, the 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. The Company is reporting a
loss from operations for the three months ended June 30, 1998 and thus has not
added potential common shares to the weighted average shares outstanding for
that period.
Page 7 of 19
<PAGE>
CELERITY SOLUTIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
4. Income (loss) Per Share, continued
The following table sets forth the computation of basic and diluted income
(loss) per share:
<TABLE>
<CAPTION>
Three Months Ended
---------------------------
June 30
---------------------------
1998 1997
---------------------------
Numerator:
<S> <C> <C>
Net income (loss) $ (103,297) $ 1,673,712
---------------------------
Numerator for income (loss) per common
share and income (loss) per share-assuming dilution $ (103,297) $ 1,673,712
===========================
Denominator:
Denominator for income (loss) per common
share-Weighted average shares outstanding 8,017,798 6,032,065
Effect of Dilutive securities: * 192,977
---------------------------
Denominator for diluted income (loss) per share-
Adjusted weighted average shares 8,017,798 6,225,042
===========================
Income (loss) per common share $ (.01) $ .28
===========================
Income (loss) per common share-assuming dilution $ (.01) $ .27
===========================
</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 597,285 shares as of the three months
ended June 30, 1998. In addition, there were options to purchase 1,195,026
shares at exercise prices between $2.42 and $4.66 per share outstanding at June
30, 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
2,500 shares at $2.47 which were outstanding at June 30, 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.
5. Sale of select multimedia assets, and acquisition of Somerset Automation,
Inc. (SAI)
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 sold include machinery and capital equipment utilized in art, animation
and audio production in St. Petersburg, Russia, and Concord, Mass. The net asset
value of assets transferred was $472,655. As part of the transaction, the
Company amended its software development contract with Blizzard Entertainment
(the Company was paid all related receivables from the contract), entered into a
work-for-hire agreement with Davidson related to software engineering services,
and assigned and transferred its present Concord, Massachusetts office lease to
Davidson. The Gain on Sale resulting from this transaction was $2,037,104.
Page 8 of 19
<PAGE>
CELERITY SOLUTIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
5. Sale of select multimedia assets, and acquisition of Somerset Automation,
Inc. (SAI), continued
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. SAI was merged into 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 seven years,
$665,323 of capitalized software was recorded and will be amortized on a
straight line basis over five years, and $3,094,527 of purchased research and
development was written off at December 8, 1997.
SAI's in-process technology involves rewriting, packaging and porting the
software to Windows NT. The Company expects to expend $400,000 during the next
12 months in order to complete these projects. Due to the high levels of
competition in the warehouse management software industry, SAI is continually
working towards improving upon existing capabilities through implementation of
additional product enhancements. In addition, due to the nature of the industry,
SAI expects additional product platforms and/or functionalities to evolve that
are currently not in development. There can be no assurance that the Company
will be able to develop and market new products or product enhancements that
respond to technological change or evolving industry standards, that new
products will be released on schedule, or that released products will achieve
any degree of market acceptance. The inability, for technological or other
reasons, to successfully develop and introduce new products or product
enhancements could have a material adverse effect on the Company's business and
its operating results and financial condition. Supplemental pro forma revenue
and cost of sales for the three months ended June 30, 1998 and 1997, assuming
the above transactions were consummated prior to April 1, 1997, are presented
below.
<TABLE>
<CAPTION>
Three Months Ended June 30,
1998 1997 $ %
Actual Proforma Change Change
---------------------------------------------------------
Revenue -----(Unaudited)-----
<S> <C> <C> <C> <C>
Services $1,933,570 $1,719,409 214,161 12.46%
Software licenses 531,136 197,721 333,415 168.63%
Hardware and other 914,671 37,870 876,801 2315.30%
---------------------------------------------------------
Total revenue 3,379,377 1,955,000 1,424,377 72.86%
Cost of sales
Services 1,398,234 946,953 451,281 47.66%
Hardware and other 781,396 29,004 752,392 96.29%
Amortization of Capitalized Software 43,266 44,494 (1,228) (2.76)%
---------------------------------------------------------
Total cost of sales 2,222,896 1,020,451 1,202,445 117.83%
---------------------------------------------------------
Gross Margin $1,156,481 $ 934,549 221,932 23.75%
=========================================================
</TABLE>
Page 9 of 19
<PAGE>
CELERITY SOLUTIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
6. Licensing, Distribution, and Development Agreements
Licensing and Distribution Agreement with Davidson & Associates, Inc. Agreement
entered into on July 11, 1995 with a worldwide licensed territory for six
software programs and related materials based upon international folktale
storybooks in a CD-ROM for Macintosh and Windows format. The Company retains all
right and title to all copyrights and trademarks contained in the work. As
consideration for the grant of license the Company receives one-half (1/2) of
the receipts less agreed upon costs and expenses. Furthermore, Davidson shall
pay the Company a non-refundable advance, against future payments resulting from
localized product, in the amount of $90,000 for each localization kit accepted
by Davidson. There were no revenues recognized from this agreement during the
three months ended June 30, 1998 or 1997. In March 1998, the Company transferred
and assigned to Davidson any and all rights in full, which the Company had under
this agreement.
Publishing and Licensing Agreement with Broderbund Software, Inc. Agreement
dated February 9, 1996 between the Company as developer and Broderbund as
publisher for a worldwide licensed territory for two (2) titles in a CD-ROM for
Macintosh and Windows format. The Company retains all right and title to all
copyrights and trademarks contained in the work. As consideration for the grant
of license the Company receives 30% of the receipts less agreed upon costs and
expenses for sales, on-line versions, sequels, foreign language adaptations and
conversions by publisher, and 50% of the receipts less agreed upon costs and
expenses for OEM sales, sequels, foreign language adaptations and conversions.
Furthermore, Broderbund shall pay the Company a non-refundable advance, against
future payments in the amount of $100,000 for each title accepted by Broderbund.
Broderbund shall also pay the Company a non-refundable advance, against future
payments resulting from localized product, in the amount of $150,000 for each
localization kit accepted by Broderbund. There were no revenues recognized from
this agreement during the three months ended June 30, 1998 or 1997.
Development Agreement with Blizzard Entertainment (Blizzard), subsidiary of
Davidson & Associates, Inc. On April 1, 1996 the Company entered into an
agreement with Blizzard to develop a computer software product based upon
Blizzard's WarCraft software series and to Blizzard's specifications for the
Windows 95 and Macintosh operating systems. As part of the agreement the Company
agrees that all rights, titles, and interest in work conceived, developed,
created, obtained, or first reduced to practice for Blizzard under this
agreement shall vest exclusively in Blizzard. Subject to certain termination
provisions, Blizzard agrees to pay the Company a development fee of $1,250,000
to be paid out at the accomplishment of milestones. Blizzard also agrees to pay
royalties to the Company as follows; 5% on net receipts from 5 million to 10
million, 7.5% on net receipts from 10 million to 15 million, and 10% on net
receipts of 15 million and above. This agreement was amended on April 16, 1997
as part of the sale of certain multimedia assets to Davidson. Under this
amendment, the Company discontinued all development work and agreed to halve any
subsequent royalty receipts, reflecting the fact that the Company was only
responsible for half of the development. The amounts payable to the Company for
future milestone attainments under this agreement was $0 at June 30, 1998 and
1997, respectively. There were no costs or revenues generated under this
agreement during the three months ended June 30, 1998 or 1997.
Page 10 of 19
<PAGE>
CELERITY SOLUTIONS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Business Developments
The Company acquired CSTI on March 31, 1997 in a transaction accounted for
under the purchase method of accounting. This acquisition provided the Company
an entry into the supply chain management (SCM) sector of the business software
market. SCM encompasses the planning and control of material and resources from
customer order entry through warehousing and logistics to customer delivery.
In April 1997, the Company sold certain of its multimedia assets to
Davidson & Associates (Davidson), a division of Cendant, Inc. The Company is
focused on the business software market and has no plans to develop new
multimedia products in the foreseeable future.
In August 1997, the Company established Paragon, a limited liability
company in St. Petersburg, Russia as a wholly owned subsidiary. Paragon develops
software for the Company. Paragon employs 10 technical personnel some of whom
were employed by the Company's subsidiary AMI, which was sold in April of 1997.
On December 8, 1997, the Company acquired all of the outstanding stock of
Somerset Automation, Inc. (SAI), a privately held warehouse management software
company based in Irvine, California by means of a merger between SAI and
Somerset Solutions, Inc. (Somerset), a wholly owned subsidiary of the Company.
SAI is a technology leader in the warehouse management software market.
Presentation
Since the Company's April 1997 sale of select multimedia assets to
Davidson, the March 1997 acquisition of CSTI, and the December 1997 acquisition
of SAI, the Company has focused principally on the business software market.
Existing multimedia software titles continue to be sold through the distribution
channels that were established prior to the divestiture. However, multimedia
revenue represents a small fraction of the Company's revenues. Actual
comparisons are discussed below. The Company has also included a supplemental
discussion at the end of this section regarding pro forma revenue, a schedule of
which is included in the notes to the financial statements.
Net Sales
Revenues from services increased $1,137,322 or 142.85% for the three months
ended June 30, 1998 versus the same period in 1997. This increase is mostly
attributable to increases in consulting and support maintenance revenues at CSTI
of $140,550 or 18.39% and the acquisition of SAI, which added $981,134 in
consulting revenue.
Revenues from software license sales increased $408,415 or 332.8% for the
three months ended June 30, 1998 versus the same period in 1997. This increase
is attributable to increases in license fee revenue at CSTI of $232,630 or
257.4% and the acquisition of SAI which added $208,136 in license fee revenue
less a decrease in multimedia royalties of $34,351. 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.
Page 11 of 19
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CELERITY SOLUTIONS, INC.
Net Sales, continued
Revenues from hardware and related sales increased $914,671 for the three
months ended June 30, 1998 versus the same period in 1997. This increase is
attributable to the acquisition of SAI, which from time to time resells third
party software and hardware with related warehouse management system
installations. Hardware sales included two large sales totaling approximately
$800,000. Hardware sales fluctuate with the installation of new systems where
the customer requires that the Company's software be integrated with hardware.
Hardware sales are not expected to attain this level in subsequent quarters for
fiscal 1999.
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
requires a significant commitment of capital and resources on the part of the
customer, the sales cycles are long and average from six to nine months. As a
result, revenue recognition is subject to many risks such as budgetary cycles,
changes in the business of a customer and overall economic trends that are not
controllable by the Company. Quarterly results have varied significantly in the
past and are likely to fluctuate in the future as a result of the timing of new
orders, product development expenditures, the number and timing of new product
completions, and multimedia product shipments and returns. A significant portion
of the Company's operating expenses are fixed and planned expenditures in any
given quarter are based on sales and revenue forecasts. Accordingly, if net
sales do not meet the Company's expectations in any given quarter, operating
results and financial condition could be adversely and disproportionately
affected. As a result of these and other factors, the Company's results of
operations and financial condition for any period are inherently difficult to
predict. The Company continues to expand all phases of sales and marketing in
order to generate long-term sales growth. The Company expects that revenues in
fiscal 1999 will increase above those reported for fiscal 1998, however there
can be no assurances as to the extent of such increase or if revenues will
increase at all.
Cost of Sales
Cost of services are incurred in connection with the sale of supply chain
and warehouse management software. Cost of services consists of costs primarily
associated with consulting and implementation services that are sold as part of
a total supply chain and warehouse management solution, and costs associated
with providing support to customers. These costs increased $873,337 or 166.38%
during the three months ended June 30, 1998 versus the same period in 1997. Cost
of services as a percent of revenue from services increased 6.39% for the three
months ended June 1998 versus the same period in 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 to increase in absolute dollars,
but not as a percent of sales during fiscal 1999.
Cost of sales from hardware and related increased $781,396 for the three
months ended June 30, 1998 versus the same period in 1997. This increase is
attributable to the acquisition of SAI, which from time to time resells third
party software and hardware with related warehouse management system
installations. Hardware sales fluctuate with the installation of new systems
where the customer requires that the Company's software be integrated with
hardware. Hardware sales are not expected to attain this level in subsequent
quarters for fiscal 1999. The Company expects that
Page 12 of 19
<PAGE>
CELERITY SOLUTIONS, INC.
Cost of Sales, continued
hardware cost of sales as a percentage of Hardware sales will continue to
average approximately 86% during the remainder of fiscal 1999, but there can be
no assurance of this expectation.
Amortization of capitalized software increased $33,266 or 332.66% during
the three months ended June 30, 1998 versus the same period in 1997. This
increase is attributable to the acquisition of SAI on December 8, 1997. This
acquisition resulted in the recording of capitalized software, which is being
amortized over five years. The actual capitalized software amortization costs
for fiscal 1999 are expected to be approximately $173,000.
Research and Development
Research and development (R&D) expenses increased $69,603 or 31.2% during
the three months ended June 30, 1998 versus the same period in 1997. The Company
expects R&D costs to increase in absolute dollars during fiscal 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 or lower than prior years, reflecting utilization of
lower development costs provided by Paragon. The R&D projects are presented
below and are grouped by each entity acquired.
CSTI's in-process technology involves several projects. Two large projects
involve a rewrite and port of the Continuum 6.0 software to Windows NT and
development applets for the Internet. These projects have estimated completion
dates within the next twelve months. The Company expects to expend $600,000
during the next 12 months in order to complete these projects. Approximately
one-half of these costs will be completed and billed to clients as part of
consulting engagements. For each installation of its technology, CSTI performs a
significant amount of customization typically requiring six months and in some
cases a year or more to complete. Due to the nature of the industry, the Company
expects additional product platforms and/or functionalities to evolve that are
currently not in development. There can be no assurance that the Company will be
able to develop and market new products or product enhancements that respond to
technological change or evolving industry standards, that new products will be
released on schedule, or that released products will achieve any degree of
market acceptance. The inability, for technological or other reasons, to
successfully develop and introduce new products or product enhancements could
have a material adverse effect on the Company's business and its operating
results and financial condition.
Somerset's in-process technology involves rewriting, packaging and porting
the software to Windows NT. The Company expects to expend $400,000 during the
next 12 months in order to complete these projects. Due to the high levels of
competition in the warehouse management software industry, the Company is
continually working towards improving upon existing capabilities through
implementation of additional product enhancement. In addition, due to the nature
of the industry, the Company expects additional product platforms and/or
functionalities to evolve that are currently not in development. There can be no
assurance that the Company will be able to develop and market new products or
product enhancements that respond to technological change or evolving industry
standards, that new products will be released on schedule, or that released
products will achieve any degree of market acceptance. The inability, for
technological or other reasons, to successfully develop and introduce new
products or product enhancements could have a material adverse effect on the
Company's business and its operating results and financial condition.
Page 13 of 19
<PAGE>
CELERITY SOLUTIONS, INC.
Depreciation
Depreciation increased $26,113 or 55.29% during the three months ended June
30, 1998 versus the same period in 1997. The acquisition of SAI was responsible
for $23,289 of the increase and the Company expects depreciation to continue to
increase during fiscal 1999 due to this acquisition. The actual depreciation
expense for fiscal 1999 is expected to be approximately $300,000.
Amortization of Goodwill
Amortization of goodwill increased $14,091 or 68.14% during the three
months ended June 30, 1998 versus the same period in 1997. The acquisition of
SAI was responsible for all of the increase and the Company expects amortization
of goodwill to continue to increase during fiscal 1999 due to this acquisition.
The actual goodwill amortization costs for fiscal 1998 are expected to be
approximately $139,000.
General and Administrative
General and administrative expenses increased $274,637 or 84.8% during the
three months ended June 30, 1998 versus the same period in 1997. Approximately
$230,000 of the increase is due to the acquisition of SAI and includes their
operating costs as well as increased costs incurred by the Company for
management and integration of Somerset. Of the remaining increase, $15,000
resulted from an increase in investor relations related activity and $25,000
from CSTI. General and administrative expenses as a percent of sales were 17.7%
and 35.2% for the three months ended June 30, 1998 and 1997, respectively. The
exclusion of hardware sales from the June 30, 1998 calculation results in a
percentage of only 24.2% versus the 35.2% in 1997. 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. The Company expects general and administrative
expenses to increase in absolute dollars, but to continue to decrease as a
percent of sales in fiscal 1999 versus the same period in fiscal 1998.
Sales and Marketing
Sales and marketing expense increased $231,405 or 186.1% during the three
months ended June 30, 1998 versus the same period in 1997. This item includes
personnel related costs, as well as, those costs related to facilities, travel,
trade shows, advertising and promotions. The acquisition of SAI resulted in an
increase of $178,000 while CSTI's selling and marketing expenses increased by
$54,000 or 43.5%. 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 to increase in absolute dollars and as a percent of sales
during fiscal 1999.
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.
Page 14 of 19
<PAGE>
CELERITY SOLUTIONS, INC.
Provision for Income Taxes
The provision for income taxes represents alternative minimum tax
liabilities and state income taxes on income earned. The Company expects an
effective tax rate of approximately 16% for fiscal year 1999. This rate differs
from the statutory rate due to anticipated partial recognition of $4,888,000 in
deferred tax assets which were fully reserved in March and June of 1998.
Liquidity and Capital Resources
The Company's primary sources of liquidity are cash, cash equivalents, and
short-term investments. During the three months ended June 30, 1998, cash, cash
equivalents, and investments decreased $ 710,057 or 30.3% to $1,631,573. This
decrease relates to $ 681,706 of cash used in operating activities (see below)
and $28,351 in capital expenditures. The Company will use its working capital to
finance its growth from ongoing operations and fund the continued expansion of
its sales and marketing resources.
Accounts receivable increased $739,581 or 33.61% to $2,940,335.
Approximately $590,000 of this increase occurred at Somerset during the three
months and represents current receivables that the company expects to receive,
and $150,000 represents an unbilled receivable at CSTI which was received in
July 1998.
Accounts payable and accrued liabilities increased $395,590 or 30.72% to
$1,685,838. Most of this increase came from Somerset and resulted from increases
in sales of third-party hardware and software, which flow though the payable
process.
Notes payable to related parties decreased $99,791, reflecting scheduled
payments being made and the subsequent shifting of other payments due from
long-term to current liabilities.
Unearned revenue decreased $184,650, reflecting the net recognition of
support maintenance and license revenue fees that are greater than the receipts
taken in on new yet-to-be recognized license fees.
The Company has a note receivable classified as current that was due on
July 31, 1998 totaling $1,203,500. The Company has been in discussions with the
debtor and expects to receive payment within 90 days. However, any further delay
in the receipt of this receivable could require the Company to obtain additional
sources of financing.
The Company believes its existing cash and cash equivalent balances,
short-term investment balances, and cash generated from operations will satisfy
the Company's working capital and capital expenditure requirements for at least
the next twelve 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 $994,927 in long-term notes payable to related parties from the
acquisitions of SAI and CSTI. These notes are payable in various amounts
beginning April 1, 1998 and ending January 1, 2001. 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.
Page 15 of 19
<PAGE>
Liquidity and Capital Resources, continued
At June 30, 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.
Pro Forma Net Sales
The following discusses the pro forma changes in the Company's financial
results assuming that the SAI acquisition and the multimedia asset sale took
place prior to April 1, 1997. The Company believes that this comparison provides
a more meaningful analysis of current and prior quarter results.
Pro forma revenues from services increased $214,161 or 12.46% for the three
months ended June 30, 1998 versus the same period in 1997. This increase is
mostly attributable to increases at CSTI and Somerset of $140,551 or 18.4% and
57,972 or 6.3%, respectively.
Pro forma revenues from software license sales increased $ 333,415 or
168.63% for the three months ended June 30, 1998 versus the same period in 1997.
This increase is attributable to increases in license fee revenue at CSTI and
Somerset of $232,630 or 257.4% and $133,136 or 177.52%, respectively, less a
decrease in multimedia royalties of 32,351. License revenue recognition
fluctuates with customer acceptance of the delivered product and product sales
to new and existing customers.
Pro forma revenues from hardware and other sales increased $876,801 or
2,315% for the three months ended June 30, 1998 versus the same period in 1997.
This increase is attributable to Somerset which resells third party software and
hardware with related warehouse management system installations. Hardware sales
included two large sales totaling approximately $800,000.
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 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.
Page 16 of 19
<PAGE>
Year 2000 Compliance Issues, continued
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
does not expect year 2000 related compliance costs to be material, but can not
assure that such costs will be inconsequential.
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.
Future Operating results, (Statutory Safe Harbor Disclosure)
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 the Form
10-KSB for March 31, 1998 filed by the Company with the SEC on June 1998 and the
S-3/A filed by the Company on July 17, 1998 with the SEC.
Page 17 of 19
<PAGE>
CELERITY SOLUTIONS, INC.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
No Litigation.
ITEM 2. CHANGES IN SECURITIES
Not Applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
ITEM 5. OTHER INFORMATION
Not Applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
On July 17, 1998, the Company filed a Form 8-K/A amending the Form 8-K
filed December 23, 1998 for the acquisition of SAI. The Company amended the
pro forma financial statements in response to a request for additional
information from the SEC.
Page 18 of 19
<PAGE>
CELERITY SOLUTIONS, INC.
SIGNATURE
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CELERITY SOLUTIONS, INC.
(Registrant)
Date: August 14, 1998 /s/ James P. Dore
------------------
James P. Dore
Controller (Principal Accounting
Officer)
Date: August 14, 1998 /s/ Edward Terino
------------------
Edward Terino
Chief Financial Officer &
Secretary / Treasurer
Page 19 of 19
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE CONDENSED
CONSOLIDATED BALANCE SHEET AT JUNE 30, 1998 AND THE CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 1998 FOUND ON PAGES
3-5 OF THE COMPANY'S FORM 10-QSB AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 920,259
<SECURITIES> 711,314
<RECEIVABLES> 3,040,615
<ALLOWANCES> (100,280)
<INVENTORY> 0
<CURRENT-ASSETS> 5,896,203
<PP&E> 1,294,601
<DEPRECIATION> (770,918)
<TOTAL-ASSETS> 8,391,972
<CURRENT-LIABILITIES> 3,543,625
<BONDS> 0
0
0
<COMMON> 884,289
<OTHER-SE> 18,900,290
<TOTAL-LIABILITY-AND-EQUITY> 8,391,972
<SALES> 914,671
<TOTAL-REVENUES> 3,379,377
<CGS> 781,396
<TOTAL-COSTS> 2,222,896
<OTHER-EXPENSES> 1,281,345
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 63,877
<INCOME-PRETAX> (123,297)
<INCOME-TAX> (20,000)
<INCOME-CONTINUING> (103,297)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (103,297)
<EPS-PRIMARY> (.01)
<EPS-DILUTED> (.01)
</TABLE>
