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, 1999
/ / 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.)
270 Bridge Street, Suite 301
Dedham, MA 02026
(Address of principal executive offices)
Issuer's telephone number: (781) 329-1900
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 [ ]
Exhibit Index Located on Page 51 Page 1 of 54
<PAGE>
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. [ ]
Issuer's Revenues for the Fiscal Year Ended March 31, 1999: $ 11,466,383
The aggregate market value of the voting stock held by non-affiliates, computed
using the sales price of such stock, as of May 31, 1999 was $ 3,940,658.
As of May 31, 1999, the number of shares of Common Stock outstanding was
8,842,886.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Definitive Proxy Statement for its 1998 Annual
Meeting of Shareholders to be held on September 10, 1999 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, 1999.
Transitional Small Business Disclosure Format Yes [ ] No [X]
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
BACKGROUND
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. 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 and employs
10 technical personnel. 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.
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 and
related expenses represent a small fraction of the Company's operations. Actual
amounts are discussed below.
CURRENT BUSINESS DEVELOPMENTS
During the quarter ended September 30, 1998, the Company announced the signing
of a multi-million dollar agreement to provide Distribution Dynamics, Inc. (DDI)
with the Company's entire suite of supply chain management software including
its real-time Supply Chain Planner, Sales Order Management, Purchase Order
Management, Warehouse Management and Inventory Control modules. This contract
will generate consulting revenues over the next two years for system
configuration and implementation. The current estimate of total revenues related
to this project is $7,500,000. DDI is a leading distributor of "C" class
commodity items, including fasteners and related items to original equipment
manufactures. This product suite, along with DDI's efforts to improve their
business processes, will provide DDI with a comprehensive system to manage their
current business divisions and the solid foundation required for future growth.
During the quarter ended March 31, 1999, the Company announced that it completed
a company-wide restructuring, including management changes and changes to its
Board of Directors. Effective March 12, 1999, Paul Carr, the founder of Client
Server Technologies, Inc. (CSTI), was appointed President and Chief Executive
Officer and assumed responsibility of the Company's day-to-day operations. Mr.
Carr has over 20 years of experience in the supply chain management software
industry, and has managed several successful companies, including Cardinal Data
Corp. and Ross Systems (Logistics Product Division). Mr. Carr and Mr. Ringuette,
the founder Somerset, were also elected to the Company's Board of Directors in
connection with the restructuring. Mr. Ringuette was elected Chairman of the
Board. Luda Kopeikina, Igor Razboff, Philip Redmond and Alan White resigned from
the Board of Directors effective March 12, 1999. Richard J. Santagati continues
to serve as a Director on the Board. Harold H. Leach, Jr. and Edward B. Merino
were elected directors to the Company's Board of Directors on April 16, 1999.
Mr. Leach is a co-founder of Legal Computer Solutions, Inc. ("LCS"). LCS is an
Internet software products company. He is also
<PAGE>
a director of Sapiens International Corporation, N.V., (NASDAQ: SPNS), a
developer of mainframe database tools. Previously, Mr. Leach was partner of the
Boston
CURRENT BUSINESS DEVELOPMENTS, CONTINUED
law firm of Choate, Hall & Stewart. Mr. Merino is founder of Office of the
Chairman Inc., a provider of corporate governance services. He is also on the
board of the Forum for Corporate Directors in Orange County, CA. Additionally,
he has served as an advisor to numerous technology companies, including SofTEK,
Affinity Media, and Concentric - an Internet service provider. For the past six
years, he was director of corporate governance at Deloitte & Touche LLP.
Effective June 28, 1999, the Company entered into debt restructuring agreements
with Paul Carr, President, Chief Executive Officer and Director of the Company,
and Luc Ringuette, the Company's Chairman of the Board of Directors.
The Company originally issued a convertible promissory note and security
agreement dated March 31, 1997 in the original principal amount of $1,613,177
(the "Carr Note") to Mr. Carr in connection with the purchase by the Company of
CSTI. In connection with the Company's debt restructuring agreement with Mr.
Carr, the principal balance of the Carr Note was reduced by $200,000 in exchange
for the license by the Company to Mr. Carr of a fully-paid perpetual license to
Mr. Carr of the Company's Supply Chain Planner software product. In connection
with the debt restructuring agreement, Mr. Carr also converted $300,000 of the
principal balance of the Carr Note to the Company's Common Stock at a conversion
price of $.40 per share. The Company engaged an independent investment banking
firm which determined that the conversion price of $.40 per share for the
Company's Common Stock was fair from a financial point of view. In connection
with the debt restructuring agreement, the Company and Mr. Carr also agreed that
the remaining principal balance of the Carr Note in the amount of $538,048 will
be paid in forty-two equal installments of principal, together with accrued
interest, at an annual rate of 8% per annum commencing July 15, 1999.
The Company originally issued a non-negotiable promissory note and security
agreement dated December 8, 1997 in the original principal amount of $448,116
(the "Ringuette Note") to Mr. Ringuette in connection with the purchase of
Somerset by the Company. In connection with the debt restructuring agreement
between the Company and Mr. Ringuette, the principal balance of the Ringuette
Note was reduced by $200,000 in exchange for the grant of a perpetual license by
the Company to Mr. Ringuette's affiliate for the Company's WMS Client Server
Software, WMS Cobol Software and Transportation Cobol software products. The
License Agreement entered into between the Company and Mr. Ringuette's
affiliated entity also provides for the payment by the affiliated entity of
royalty payments to the Company equal to not less than $500,000, subject to
licensing fees actually received by the affiliated entity. The debt
restructuring agreement between the Company and Mr. Ringuette also provides that
the remaining principal balance of the Runguette Note in the amount of
$239,959.71 will be paid in thirty-six (36) equal installments of principal,
together with accrued interest, at an annual rate of 8% per annum commencing
July 15, 1999.
The Company also completed a reduction of its domestic work force by
approximately 20% and decreased operating expenses. The employment and cost
reductions affect all functional areas of the Company at its Dedham, MA and
Irvine, CA locations. The reductions are expected to save approximately $150,000
a month beginning in April 1999.
<PAGE>
RESULTS OF OPERATIONS
REVENUE
Revenue from services increased $3,901,557 or 74% for the fiscal year ended
March 31, 1999 versus fiscal 1998. This increase is attributable to the
acquisition of SAI on December 8, 1997, which increased service revenue
$3,287,828 and an increase in service revenue generated by CSTI of $613,729. The
increase in CSTI's revenue was attributable to a substantial increase in
billable services on two projects during the forth quarter. Management believes
that the slow down in application purchases resulting from the year 2000 change
over will cause revenue from services to decrease in fiscal 2000 from the fiscal
1999 level.
Revenue from software license sales increased $474,135 or 63% for the year ended
March 31, 1999 versus 1998. This increase is attributable to increases in
license fee revenue at CSTI of $258,369 or 59% and the acquisition of SAI on
December 8, 1997, which added $374,691 of license fee revenue, partially offset
by decreases in multimedia royalties of $158,925 or 97%. CSTI's increase is
attributable in part to the recognition of license fees from a source code sale
of $300,000 and percentage of completion recognition of license fees in the
third quarter. Software license revenue recognition fluctuates due to product
sales to new and existing customers varying from year to year and the portion of
projects completed also varies from year to year. The Company continues to
invest in sales and marketing in order to generate long-term business software
sales growth despite the company-wide reorganization, however we are not certain
as to the extent of such increase or if revenue will increase at all.
Revenue from hardware and related sales increased $912,378 for year ended March
31, 1999 versus 1998. These changes are attributable to the acquisition of SAI,
which from time to time resells third party software and hardware with related
warehouse management system installations at the customer's request. Hardware
sales during the first quarter of fiscal 1999 included two unusually large
hardware 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 2000.
The level of net sales realized by the Company in any quarter is principally
dependent on the portion of projects completed. 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 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, and the number
and timing of new product completions. 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.
<PAGE>
COST OF SALES
Cost of services are incurred in connection with the sale of supply chain and
warehouse management software. Cost of services consist 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 $2,539,081 or 77%
during the year ended March 31, 1999 versus 1998. This increase was primarily
due to the acquisition of SAI. Cost of services as a percent of revenue from
services increased from to 64% from 63% for the year ended March 31,1999 versus
1998. The Company's cost of sales as a percent of sales also increased due to
the completion of several projects that incurred non-billable time during the
second and third quarters and the delay in the start of new projects. In fiscal
2000, management believes that costs of sales will decline in both absolute
dollars and as a percentage of sales when compared with fiscal 1999.
Cost of sales from hardware and third party license fees increased $793,070 or
802% during the year ended March 31,1999 versus 1998. 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. The Company expects that hardware cost of sales as a percentage of
hardware sales will continue to average approximately 86%, but there can be no
assurance of this expectation.
Amortization of capitalized software increased $91,983 or 107% during the year
ended March 31, 1999 versus 1998. This increase is a result of a full 12 months
of amortization relating to SAI being included in the fiscal 1999 Statements of
Operations, versus only 4 months of amortization in fiscal 1998. This
acquisition resulted in the recording of capitalized software, which is being
amortized over five years.
RESEARCH AND DEVELOPMENT
Research and development (R&D) expenses increased $828,261 or during the year
ended March 31, 1999 versus 1998. This increase is a result of Somerset R&D
employees on the payroll for all of fiscal 1999 versus only a portion of fiscal
1998. R&D as a percent of sales, excluding hardware sales, increased from 15% to
16% for the year ended March 31, 1999. The Company capitalized $35,000 of third
quarter R&D costs related to the Continuum 6.1 Software for Windows NT, this
consisted of enhancements to the Continuum 6.1 Software for Windows NT that was
completed in December 1997. The Company capitalized $125,012 of third quarter
R&D costs related to the Unix/Oracle version of the WMS software. The
Unix/Oracle version of the WMS and the enhanced version of the Continuum 6.1for
Windows NT products reached technological feasibility in the third quarter and
will be available for general release within the next nine months. In fiscal
2000, management expects R&D costs to decrease as a percentage of sales versus
fiscal 1999, primarily due to the allocation of the R&D staff to billable
projects and thus being included in cost of sales. Acquired in-process R&D
projects are presented below and are grouped by each entity acquired.
<PAGE>
Due to the nature of the industry, the Company expects additional product
platforms and/or functionality's 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.
GENERAL AND ADMINISTRATIVE
General and administrative (G&A) expenses increased approximately $1,004,000 or
63% during the year ended March 31, 1999 versus 1998. Approximately $460,000 of
this increase was due to the acquisition of SAI and included operating costs as
well as costs incurred by the Company for management and integration of
Somerset. Of the remaining increase, approximately $102,000 resulted from an
increase in investor relations related activity, approximately $43,000 from a
negotiated settlement of the note receivable acceleration from Henninger and
approximately $308,000 from an increase in G&A staffing and related expenses,
including recruiting fees. G&A expenses as a percent of sales, excluding
hardware sales, decreased to 25% from 26% for the year ended March 31, 1999
versus 1998 respectively.
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. Management believes
that these costs will decrease in fiscal 2000 over fiscal 1999 in absolute
dollars and as a percentage of sales. This is mostly attributable to the company
wide restructuring with resulted in lower G&A expenses.
SALES AND MARKETING
Sales and marketing expenses increased $2,150,101 or 259% during the year ended
March 31, 1999 versus 1998. Sales and marketing expenses include costs related
to personnel, facilities, travel, trade shows, advertising and promotions. The
acquisition of SAI resulted in increases in general sales and marketing of
approximately $1,333,000. CSTI's regularly occurring selling and marketing
expenses increased by $231,376 during the year ended March 31, 1999 versus 1998.
The Company also had write-offs of uncollectible accounts receivable which were
expensed and charged to sales and marketing departments of approximately
$1,347,000. These write-offs were the result of one customer experiencing severe
financial difficulty and of two customers being acquired and deciding not to
implement the licensed software. Sales
<PAGE>
SALES AND MARKETING, CONTINUED
and marketing as a percentage of sales (excluding hardware revenue) increased to
29% from 14% for the year ended March 31, 1999 versus 1998. The Company is
committed to an investment in sales and marketing efforts, though its liquidity
problems have led to a slow down in expenditures commencing in March 1999. The
Company plans to add new sales and marketing personnel in the second quarter of
fiscal 2000.
These efforts are expected to increase future revenue. The Company is not
certain it will be able to realize the benefits from this investment. The
Company expects sales and marketing expenses to decrease in absolute dollars and
as a percent of sales during fiscal 2000 because of the receivable write-offs of
uncollectible accounts receivable and cost reductions implemented as part of the
company-wide restructuring in fiscal 1999
PURCHASED IN PROCESS RESEARCH & DEVELOPMENT (CSTI)
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.
In order to determine the purchase price accounting for the CSTI acquisition, an
independent third party was engaged to complete a valuation of the intangible
assets of CSTI acquired by the Company. The Company's accounting practice, in
accordance with generally accepted accounting principals, is to expense research
and development costs, therefore, the Company recorded a write-off of $2,200,000
for CSTI related to in-process research and development.
CSTI's acquired in-process technology, as of the date of the acquisition
included, the development of applets for the internet, re-writing and porting of
the Continuum 6.0 software to Windows NT, the development of the DRP software
package and the porting of the software onto the Sun Solaris platform.
<PAGE>
The following table provides information regarding the CSTI acquisition:
<TABLE>
<CAPTION>
Stage of Stage of
completeness, completeness, Expected Estimated cost
at date of at date of completion, at to complete, at Actual costs
acquisition acquisition date of date of incurred to
Project in hours in dollars acquisition acquisition complete
------- -------- ---------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C>
Internet applets 90% 90% Fiscal 1998 $10,000 $5,000
Windows NT 50% 50% Dec. 1997 $300,000 $300,000
DRP software 80% 80% Dec. 1997 $160,000 $170,000
Port to Sun
Solaris 40% 40% July 1997 $120,000 $90,000
</TABLE>
CSTI's acquired in-process technology projects are all complete as of March 31,
1999. The development of applets for the Internet did not achieve technological
feasibility and was not continued. This project, in total, involved
approximately $90,000 in development costs and is not considered material. The
other three in-process projects were the rewriting and porting of the Continuum
6.0 software to Windows NT, the development of the DRP software package and the
porting of the software onto the Sun Solaris platform. These projects were
completed and achieved technological feasibility within the original estimates
used in the acquisition valuation. There are no changes in the Company's
expectations of these projects from the original valuation. The benefit to the
Company from the DRP software was immediate. The Windows NT project began to
benefit the Company on completion in December of 1997.
In completing the valuation of intangible assets associated with the CSTI
acquisition, the Company identified all projects that were either completed or
in-process. The Company
<PAGE>
then determined whether the projects were in-process based on applicable
accounting literature including, SFAS No. 86: Accounting for Software Costs and
SFAS No. 2: Accounting for Research and Development Costs. The Company, with the
assistance on an independent third party, used a discounted cash flow on
projected income method to compute the value of intangible assets. The discount
rate used for the valuation for in process technology was 23%.
In determining the value of the intangible assets of CSTI, the Company made a
number of assumptions about the future operating performance. The Company
assumed no significant increases in revenue in the existing Continuum product
line due to the introduction of the new version in early 1998. The Company
assumed that CSTI's gross margin was expected to improve only slightly. The cost
estimates utilized in the valuation approximate the actual cost incurred to
complete the projects, but revenue projections for fiscal 2000 are lower than
anticipated because of the resources necessary to continue to accelerate revenue
growth. This growth will be slower than originally anticipated, but management
believes that these projects will continue to grow revenue over the long term.
The Weighted Average Cost of Capital (WACC) measures a company's cost of debt
and equity financing weighted by the percentage of debt and percentage of equity
in a company's target capital structure. The cost of debt financing for the CSTI
acquisition was not considered meaningful because debt financing was an
insignificant component of the Celerity structure. The estimate of the cost of
equity financing was derived utilizing the "Capital Asset Pricing Model" (CAPM)
which measures the return required by investors given the company's risk
profile. The resulting rate is the sum of the risk-free rate of 6.9% which is
equal to the long-term treasury securities rate, plus an equity risk premium of
7.4% multiplied by the beta coefficient of 1.2 for the volatility of the CSTI
transaction, or 8.9%, for an after tax cost of equity for the assets as a whole
of approximately 15.8%. The estimated discount rates for the valuation of
individual assets for the CSTI acquisition were derived taking into
consideration factors such as the intensity of the competitive environment, the
size and resources of the competitors and other factors.
The following is a table that provides historical and projected revenue, cost of
sales, gross margin, operating expenses, and operating profit data for CSTI. The
projected data was prepared with input from the management from the acquired
company.
<PAGE>
Twelve Months Ending
- ------------------------ ---------------- ----------------
Mar., 1999 Mar., 2000
Projected Projected
- ------------------------ ---------------- ----------------
Sales $5,125 $6,400
- ------------------------ ---------------- ----------------
Gross Margin % 63.9% 61.8%
- ------------------------ ---------------- ----------------
Selling, general and
administrative % 31.6% 31.6%
- ------------------------ ---------------- ----------------
Research and
Development % 8.5% 8.3%
- ------------------------ ---------------- ----------------
CSTI's sales were expected to grow at a rate greater than their recent history
due to the expected introduction following the acquisition of new products
described as under development. Further, it was anticipated that professional
service rates and license fees would be increased in line with the market. Cost
of sales was expected to decrease as a percent of sales from CSTI's recent
history (an average of 64.6% of sales from 1994 through 1998 to an average of
37.2% of sales for 1999 and 2000) for several reasons including, a shift in
sales mix from professional services to license fees and the anticipated
increase in professional services rates and license fees. Operating expenses
were expected to increase from CSTI's recent history (an average of 25.8% of
sales to an average of 31.6% of sales for 1999 and 2000) due to an increased
investment in sales and marketing expenses needed to develop a direct sales
organization and develop indirect sales channels.
PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT (SAI)
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. As a result of the
acquisition, $394,553 of goodwill was recorded, which is being amortized on a
straight line basis over 7 years, $665,323 of capitalized software was recorded,
which is being amortized on a straight line basis over 5 years. This transaction
was accounted for under the purchase method of business combinations.
<PAGE>
In order to determine the purchase price accounting for the SAI acquisition, an
independent third party was engaged to complete a valuation of the intangible
assets of SAI acquired by the Company. The Company's accounting practice, in
accordance with generally accepted accounting principals, is to expense research
and development costs, therefore, the Company recorded a write-off of $3,094,527
for SAI related to in-process research and development.
<PAGE>
Somerset's in-process technology, as of the date of the acquisition, included,
rewriting, packaging and porting software to Windows NT and the Unix/Oracle port
project . The following table provides information regarding the SAI
acquisition:
<TABLE>
<CAPTION>
Stage of Stage of
completeness, completeness, Expected Estimated cost
at date of at date of completion, at to complete, at Actual costs
acquisition acquisition date of date of incurred to
Project in hours in dollars acquisition acquisition complete
------- -------- ---------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C>
Windows NT 50% 56% Early 1998 400,000 $350,000
Unix/Oracle port
project 95% 90% Early 1998 250,000 $225,000
</TABLE>
Somerset's in-process technology currently involves one project; rewriting,
packaging and porting software to Windows NT. The Company expects to expend
$50,000 during the next 6 months in order to complete this project. The
Unix/Oracle port project which was in-process at the time of acquisition has
been completed and has achieved technological feasibility within the acquisition
valuation estimates. There are no changes in the Company's expectations of this
project from the original valuation. 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 determining the value of the intangible assets of SAI, the Company made a
number of assumptions about the future operating performance. It assumed that
future revenues would increase at a rate greater than SAI's recent history due
to the introduction of several new products that were under development at the
time of the acquisition, including the introduction of radio frequency
capability for SAI's Warehouse Management product, a Windows NT solution, and
several Internet applets for existing
<PAGE>
modules. The Company assumed that SAI's gross margin would be improved due to
several factors including: a shift in product mix from professional services to
license fees; adjustments to professional service rates and license fees; and
utilization of Russian software engineers for development that would be more
cost effective than U.S. based resources. The Company estimates that products
under development will be completed within the next six months. The Company
increased its operating expenses, particularly in sales and marketing as a
percent of sales to accelerate revenue growth. The cost estimates utilized in
the valuation approximate the actual cost incurred to complete the projects, but
revenue projections for fiscal 2000 are lower than anticipated because of the
resources necessary to continue to accelerate revenue growth. This growth will
be slower than originally anticipated, but management believes that these
projects will continue to grow revenue over the long term.
In completing the valuation of intangible assets associated with the SAI
acquisition, the Company identified all projects that were either completed or
in-process. The Company then determined whether the projects were in-process
based on applicable accounting literature including, SFAS No. 86: Accounting for
Software Costs and SFAS No. 2: Accounting for Research and Development Costs.
The Company, with the assistance on an independent third party, used a
discounted cash flow on projected income method to compute the value of
intangible assets. The discount rate used for the valuation for in process
technology was 30%. This rate was derived based on two primary factors: the cost
of capital to the Company and the level of risk that the investment represented.
The result of the valuation for SAI was a value of $4 million for in process
technology.
The Weighted Average Cost of Capital (WACC) measures a company's cost of debt
and equity financing weighted by the percentage of debt and percentage of equity
in a company's target capital structure. The cost of debt financing for the
Somerset acquisition was assumed to approximate the cost of debt for Celerity.
Accordingly, a rate of 7.36% was applied, which is equal to the Baa rated
corporate bond rate as of December 5, 1997. Since this represents a pretax cost
of debt, the selected tax rate of 41% was applied to arrive at an after-tax cost
of debt of 4.34%. The estimate of the cost of equity financing was derived
utilizing the "Capital Asset Pricing Model" (CAPM) which measures the return
required by investors given the company's risk profile. The resulting rate is
the sum of the risk-free rate of 5.9% which is equal to the long-term treasury
securities rate, plus an equity risk premium of 7.5% multiplied by the beta
coefficient of 1.2 for the volatility of the Somerset transaction, or 9.0%, plus
the small company risk premium of 3.5%, plus the unsystematic risk factor of
2.0% for an after tax cost of equity for the assets as a whole of approximately
20.4%. The estimated discount rates for the valuation
<PAGE>
of individual assets for the Somerset acquisition were; Developed Technology -
25%, In-Process Technology - 30%, and Trade Name and Trademark - 30%. "
The following is a table that provides historical and projected revenue, cost of
sales, gross margin, and operating expenses for Somerset Automation. The
projected data was prepared with input from the management of the company.
Twelve Months Ending
- ------------------------ ---------------- ----------------
Mar., 1999 Mar., 2000
Projected Projected
- ------------------------ ---------------- ----------------
Sales $6,003 $11,300
- ------------------------ ---------------- ----------------
Cost of sales % 38.8% 36%
- ------------------------ ---------------- ----------------
Gross Margin % 61.2% 64%
- ------------------------ ---------------- ----------------
Selling, general and
administrative % 31% 31%
- ------------------------ ---------------- ----------------
SAI's sales were expected to increase in fiscal 2000 at a rate greater than
recent history due to the anticipated introduction of products under development
at the time of the acquisition, including primarily the Windows NT platform.
Cost of sales were expected to decrease as a percent of sales from SAI's recent
history due to the introduction of Windows NT and the discontinuation of COBOL
in fiscal 1999. Specifically, the shift in product mix from COBOL (12% of sales)
and Unix/Oracle (88% of sales) in fiscal 1998 to COBOL (6% of sales),
Unix/Oracle (61% of sales), and Windows NT (33% of sales) in fiscal 1999 was
expected to have the greatest impact on gross margins of the business. Further,
in fiscal 2000, COBOL was expected to be completely discontinued and Unix/Oracle
(50% of sales) and Windows NT (50% of sales) were expected to be the remaining
revenue generating products of the business. In regards to operating expenses,
the Company estimated these expenses to remain at 31% of SAI sales and expected
that these levels would sufficiently fund general and administrative expenses
and all sales and marketing initiatives involving the release of new product
introductions. Finally, research and development costs were expected to be
associated with projects under
<PAGE>
development only and were therefore only considered in determining the
appropriate allocation between 'in-process completed' technology and `in-process
to be completed' technology as of the date of acquisition.
AMORTIZATION OF GOODWILL
Amortization of goodwill increased $36,886 or 36% during the year ended March
31, 1999 versus 1998. The acquisition of SAI was responsible for all of the
increase. The Company expects that goodwill amortization will remain the same in
fiscal 2000.
REORGANIZATION EXPENSES
The Company underwent a company-wide restructuring during the forth quarter of
fiscal 1999. Reorganization expenses are related to various severance
arrangements and the placement fees associated with the termination of two
employment contracts.
GAIN ON SALE OF ASSETS
The gain of $2,037,104 in Fiscal 1998 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>
INCOME TAXES
The provision for income taxes is a benefit arising from the reconciliation of
current and deferred income tax liabilities on the books of Somerset at the time
of acquisition. These deferrals and liabilities were related to an amendment to
their prior year return, as well as their final short year tax return. This
benefit was reduced by alternative minimum tax liabilities and state income
taxes. The Company's effective tax rate Fiscal 1999 is %.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity are cash and cash equivalents. During
the year ended March 31, 1999, cash and cash equivalents and short term
investments decreased $1,927,003 or 82% to $414,627. This decrease relates to
$1,440,109 of cash used in operating activities, $326,883 in capital
expenditures, and $160,012 in capitalized software costs.
Accounts receivable increased $573,573 or 26% to $2,774,327. The increase
reflects increases associated with an increase in billings related to the DDI
project. During the forth quarter management completed negotiations to collect
and write-off approximately $800,000 in past due receivables. Over 80% of the
receivable balance remaining on March 31, 1999 has been collected subsequent to
year end.
Notes and guaranteed royalties receivable decreased $1,147,393 or 99% from
payments received related to the Henninger note.
Accounts payable and accrued liabilities increased $1,149,611 or 89% to
$2,432,507. This increase includes increases in accrued payroll and related
costs including severance accruals related to the reorganization during the
forth quarter of approximately $439,000, accrued interest on notes to related
parties, and increases in amounts due to subcontractors. Payables also increased
because of a slow down in payments because of the Company's cash position.
Income taxes payable decreased $507,577 during the year ended March 31, 1999.
This decrease was related to the finalization of the Somerset tax returns as of
the acquisition date and the resulting reconciliation of the estimated liability
and payments made to the payable set up.
Subsequent to March 31, 1999, the Company successfully renegotiated several
notes payable to related parties. As a result of negotiations with the note
holders, $1,215,198 of debt previously scheduled to be repaid in the fiscal year
ending March 31, 2000 has been reclassified to long term debt. In addition, the
largest two notes were partially offset by non-exclusive license fees sales to
the related parties totaling $400,000 and the conversion of $300,000 from debt
to equity.
Management anticipates declining revenues in fiscal 2000 as a result of the year
2000 change over slowing purchase decisions. Management believes operating
expenses have been reduced sufficiently to achieve profitability and allow
operating cash flows in fiscal 2000 to meet all current obligations. In the
event revenues decline further than planed, additional expense reductions will
be made. These reductions would be made in the non-revenue generating
departments including administration, marketing, sales and research and
development. The Company also has access to $800,000 in receivables factoring
through an agreement with Imperial Bank. If necessary other financing options
will be explored. For example, the Company could attempt to renegotiate
agreements with its major note holders who have been willing to reschedule
payments in the past to improve the Company's liquidity. The Company could also
attempt to provide stock as compensation to management and could seek additional
sources of equity and debt financing. The Company is not certain
<PAGE>
that these financing sources will be available or if available will be available
at a reasonable cost.
LIQUIDITY AND CAPITAL RESOURCES, CONTINUED
Looking forward to 2001, the Company expects sales to increase as decisions
delayed by the year 2000 change over are made. The Company at this point expects
license revenues to increase as a percentage of sales with the successful
completion of the NT version of the Warehouse Management product and the
addition of distributors carrying the Company's products. Also, the cash
payments required to satisfy certain short term notes will also be completed.
There is no assurance that the Company can achieve the profitability and
positive liquidity discussed above.
Long term and short term notes payable to related parties decreased $551,332,
reflecting scheduled payments being made. Several of these notes were
renegotiated during the forth quarter and again subsequent to year-end.
Unearned revenue decreased $58,976, reflecting the net recognition of support
maintenance and license revenue fees that are lower than the receipts taken in
on new yet-to-be recognized license fees. This decrease was also partially
caused by a decrease in renewals of the Company's support maintenance
agreements, which were on its older platforms and are being replaced by the new
NT and UNIX versions.
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. Any
material acquisitions of complementary business, products or technologies would
require the Company to obtain additional sources of financing.
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. The risk for
Celerity exists in four areas: systems used by the Company to run its business,
systems used by the Company's vendors, potential warranty or other claims from
the Company's customers, and the potential reduced spending by others companies
as a result of significant information systems spending on Year 2000 issues.
The Company has inventoried and evaluated its internal systems, equipment, and
facilities and established a schedule to replace or upgrade systems that are
known to be Year 2000 non-compliant. The Company utilizes outside providers for
services such as payroll processing and 401(k) benefit administration, which may
or may not be Year 2000 compliant.
The Company has requested and received from a majority of its vendors written
confirmation of their knowledge of or plans for Year 2000 compliance. The
Company has taken steps to make sure that its internal systems will function in
the Year 2000, 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 Year 2000 costs cost to date have not been material. The Company
does not expect future Year 2000 related compliance costs to be material, but
can not be certain that such costs will be inconsequential. The Company has not
identified alternative contingency plans, but will do so as it continues to
assess the Year 2000 risk.
<PAGE>
The Company's software products have been modified to be Year 2000 compliant.
However, the Company's products are complex and could contain undetected errors
or failures even
<PAGE>
YEAR 2000 COMPLIANCE ISSUES, CONTINUED
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.
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.
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 "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.
<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: October 1, 1999 /s/
------------------------------------
Cheryl McCarthy
Controller (Principal Accounting
Officer)
Date: October 1, 1999 /s/
------------------------------------
Paul Carr
President, Chief Financial Officer &
Secretary / Treasurer
<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 December
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).
<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).
<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 Licensing 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).
10.56 Accounts Receivable Factoring Agreement with recourse between the
Company and Imperial Bank dated February 18, 1999.
10.57 Letter Agreement dated July 13, 1999 between the Company and Paul Carr
relating to the renegotiation of the Convertible Promissory Note and
Security Agreement dated March 31, 1997.
10.58 Letter Agreement dated July 13, 1999 between the Company and Luc
Ringuette relating to the renegotiation of the Non-negotiable
Promissory Note and Security Agreement dated December 8, 1997.
10.59 Source Code License Agreement dated July 13, 1999 between the Company
and Luc Ringuette relating to the renegotiation of the Non-negotiable
Promissory Note and Security Agreement dated December 8, 1997.
10.60 Source Code License Agreement dated July 13, 1999 between the Company
and Paul Carr relating to the renegotiation of the Convertible
Promissory Note and Security Agreement dated March 31, 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.
<PAGE>
Exhibit
Number Exhibit Name
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).
99.17 Press Release announcing the Company had entered into a multi-million
dollar agreement with Distribution Dynamics, Inc (DDI), a Walnut
Creek, California-based, distributor of "C" class commodity items,
including fasteners and related items to original equipment
manufacturers dated October 26, 1998. (incorporated by reference
herein to the exhibit filed with the Company's From 8-K filed October
27, 1998).
99.18 Form 8-K/A amending the Form 8-K filed December 23, 1998 for the
acquisition of Somerset Automation Inc. The Company amended the pro
forma financial statements in response to a request for additional
information from the SEC. (incorporated by reference herein to the
exhibit filed with the Company's From 8-K/A filed July 17, 1998).
Celerity Solutions, Inc.
Exhibit 10.56 Account receivable Factoring Agreement
IMPERIAL BANK
AGREEMENT FOR PURCHASE OF RECEIVABLE
(Full Recourse)
This AGREEMENT is made on February 18, 1999 by and between Celerity Solutions,
Inc. having its principal place of business at 270 Bridge Street, Dedham, County
of Norfolk, State of MA 02026, (the "Seller") and Financial Accounts Management
Services, a division of Imperial Bank, having a place of business at 220 Air
port Parkway, San Jose, California, 95110 (the "Purchaser".)
1. Definitions. The following terms shall the meanings stated:
1.1 "Account Balance" - on any given day, the gross amount of all Purchased
Receivables and other Obligations unpaid on that day.
1.2 "Account Debtor" - the obligor on a Purchased Receivable.
1.3 "Adjustments" - all discounts, allowances, returns, disputes,
counterclaims, offsets, defenses, rights of recoupment, rights of return,
warranty claims, or short payments assigned by or on behalf of any Account
Debtor with respect to any Purchased Receivable.
1.4 "Advance" - the dollar amount computed with respect to each Purchased
Receivable, equal to the Advance Rate multiplied by the face amount of the
Purchased Receivable.
1.5 "Advance Rate" - 80%
1.6 "Collateral"
1.6.1. All now owned and hereafter acquired right title and interest in, to
and in respect of all accounts, interests in goods represented by accounts,
returned, reclaimed or repossessed goods with respect thereto and rights as an
unpaid vendor contract rights, chattel paper, general intangibles (including,
but not limited to tax refunds, registered and unregistered patents, trademarks,
service marks, copyrights, trade names, applications for the foregoing, trade
secrets, goodwill, customer lists, licenses, whether as a licenser or licensee,
chooses in action and other claims, and existing and future leasehold interests
in equipment, real estate and fixtures), documents, instruments, letters of
credit, bankers' acceptances or guaranties; deposits, securities, bank accounts
deposit accounts, credits and other property now or hereafter held in any
capacity by Purchaser or its affiliates.
1.6.2 All now owned and hereafter acquired right title and interest in, to
and in respect of all goods, including but not limited to:
1.6.2.1 All inventory, wherever located, whether now owned or
hereafter acquired, of whatever kind, nature or description, including all
new materials, work-in-process, finished goods.
1.6.2.2 All equipment and fixtures, wherever located, whether now
owned or hereafter acquired, and any and all additions, substitutions,
replacements (including spare parts) and accessions thereof and thereto.
1.6.2.3 All present and future books and records relating to any of
the above including, without limitation, all computer programs, printed
output and computer readable data in the possession or contract of the
Seller, any computer service bureau or other third party.
1.6.2.4 All products and proceeds of the foregoing in whatever form
and wherever located, including, without limitation, all insurance
proceeds, all claims against third parties for loss or destruction of or
damage to any of the foregoing, and all income from the lease or rental of
any of the foregoing.
1.7 "Customer Payments" - all good funds received by Purchaser from or on
behalf of an Account Debtor with respect to Purchased Receivables.
1.8 "Face Amount of Purchased Receivables" - the gross amount due from the
Account Debtor, less any discounts allowed to the Account Debtor, computed on
the shortest selling terms stated in the invoice evidencing the Purchased
Account.
1.9 "Factor Fee" - rate of 1.75% - 25% of Face Amount of each invoice.
(Italicized verbiage added and initialed)
1.10 "Administrative Fee" - The minimum monthly fee of $0.00.
1.11 "Obligations" - all obligations now or hereafter owed by the Seller to
the Purchaser, including but not limited to the obligations created hereunder.
1.12 "Obligor" - the Seller and all guarantors and other entities who may
be obligated to pay the Obligations.
<PAGE>
1.13 "Purchased Receivables" - all those accounts, chattel paper,
instruments, contract rights, documents, general intangibles, and rights to
payment, and proceeds thereof, arising out of the invoices and other agreements
identified on or delivered with any Transmittal Sheet provided by Seller to
Purchaser.
1.14 "Receivables" - all present and future accounts and general
intangibles of the Seller.
1.15 "Remittance" - the amount, if any, which Purchaser owes to Seller at
each Settlement Date, according to the accounting prepared by Purchaser equal
to:
1.15.1: The sum of:
1.15.1.1 The base as of the beginning of the last Settlement
Date, Plus
1.15.1.1.1 The Reserve created for each Purchased Receivable
purchased during since last Settlement Date, Minus
1.15.2 The total since the last Settlement Date of
1.15.2.1 Administrative Fees on paid Purchased Receivables.
1.15.2.2 Factor Fee on paid Purchased Receivables.
1.15.2.3 Adjustments
1.15.2.4 Repurchase Amounts (to the extent Purchaser has agreed
to accept payment thereof or deduction from the Remittance: and
1.15.2.5 The Reserve based on the Account Balance as of the
Settlement Date.
1.16 "Repurchase Amount" - See 4.1 below.
1.17 "Reserve" - A percentage of the Account Balance, computed as the
difference between the Face Amount of Purchased Receivables and the Advance,
which shall be determined by Purchaser in its reasonable sole discretion, based
on the nature and quality of the Purchased Receivables, and which shall not be
less than 20% less all fees on unpaid Purchased Receivables. The Reserve shall
be the book balance maintained in the records of Purchaser and shall not be a
segregated fund.
1.18 "Settlement Date" - the day that remittance is calculated and paid.
1.19 "Transmittal Sheet" - the forms supplied by Purchaser to Seller which
identify the receivables of Seller which it requests that Purchaser purchase.
2. Purchase Receivables
2.1 Seller for and in consideration of the Advances and other valuable
consideration, does hereby absolutely sell, assign and transfer to Purchaser all
of Seller's right, title and interest in and to the Purchased Receivables and
all moneys due or which may become due upon such Purchased Receivables.
2.2 Purchaser is not obligated to purchase any Receivables from Seller.
2.3 Purchaser may exercise its sole discretion in approving the credit of
each Account Debtor before buying any receivables.
2.3 Purchaser may have with respect to the Purchased Receivables, all the
rights and remedies of an unpaid seller under the Uniform Commercial Code and
other applicable law, including the rights of replevin, claim and delivery,
reclamation, and stoppage in transit.
3. Terms of Purchase
3.1 Each Transmittal Sheet shall reasonably identify the Purchased
Receivables, correctly state the amount owed by the Account Debtor, and shall be
signed by an authorized signatory of Seller.
3.2 Seller hereby authorizes Purchaser to insert in the Transmittal Sheet
information to describe the Purchased Receivables.
3.3 Purchaser is entitled to rely on the contents of any Transmittal Sheet
delivered by Seller, to treat the Receivables described therein as Purchased
Receivables, and to rely on the signature as an authorized signatory of Seller.
3.4 Upon acceptance and purchase by Purchaser of the Receivables described
on each Transmittal Sheet and upon Seller's request, Purchaser shall pay the
Advance to Seller.
3.5 Should Purchaser determine at any time in the reasonable exercise of
its discretion that the nature and quality of the Purchased Receivables has
deteriorated, Purchaser may change the Advance Rate with respect to all future
purchases of Receivables.
3.6. As Purchaser collects Customer Payments from or on behalf of Account
Debtors, Purchaser shall promptly credit the Customer Payments to the Account
Balance on a daily basis as funds clear, as determined by Seller in its
reasonable discretion. In the alternative, Purchaser shall have the right to
delay credit to the Account Balance for a reasonable (no more than 5 days)
number of days with respect to all Customer Payments, to allow for clearance and
collection of funds. Note: Italicized verbiage added, dated, and initialed.
3.7 If Seller is in default under this Agreement, all Customer Payments
will be applied to any Obligations in such order and manner as Purchaser shall
determine, irrespective of contrary instructions which may be received from
Seller or the payer.
3.8 Purchaser shall charge and be entitled to and Seller shall pay on each
Settlement Date the Administrative Fee and the Factor Fee on all past Purchased
Receivables.
<PAGE>
3.9 Purchaser shall prepare and send to Seller, after close of business
each month, an accounting of the transactions for that month. The accounting
shall be deemed correct and conclusive, and shall constitute an account started
between the parties unless Seller makes written objection to Purchaser within 30
days after mailing of the accounting to the Seller.
3.10 Purchaser shall pay the Remittance to Seller within 3 days after the
Settlement Date.
3.11 In the event the calculation of the Remittance results in an amount
due to Purchaser from Seller, Seller shall make such payment in the same manner
as set forth in Section 4.2.
4. Repurchases and Recourse Purchaser's purchase of Purchased Receivables from
Seller shall be with full recourse.
4.1 Purchaser may increase the Reserve, and Seller agrees to pay to
Purchaser on demand, the full amount or any unpaid portion thereof, of any
Purchased Receivable (the "Repurchase Amount").
4.1.1 Which remains unpaid ninety (90) calendar days after invoice date:
4.1.2 Which is owed by an Account Debtor which has filed, or has had filed
against it, any bankruptcy case or insolvency proceeding or who has become
insolvent (as defined in the Federal Bankruptcy Code) or who is generally not
paying as not paying its debts as such debts become due:
4.1.3 With respect to which there has been any breach of warranty set forth
in Section 6 hereof, or any breach of any covenant contained in this Agreement,
or
4.1.4 With respect to which the account debtor asserts any discount,
allowance, return, dispute, counterclaim offset, defense, right of recoupment,
right of return, warranty claim, or short payment, together with all reasonable
attorneys' and professional fees and expenses and court costs incurred by
Purchaser in collecting the Purchased Receivable and/or enforcing its rights
under this agreement.
4.2 Purchaser may, in its sole discretion, demand that the Repurchase
Amount to be paid by Seller (A) in cash immediately upon demand thereof; (B) by
delivery of substitute invoices acceptable to Purchaser which shall thereupon
become Purchased Receivables; (C) by deduction from the Remittance which would
otherwise be due to Seller, or by any combination of the foregoing as Purchaser
may from time to time choose.
5. Power of Attorney Seller hereby irrevocably appoints Purchaser and its
successors and assigns as Seller's true and lawful attorney in fact, with
respect to Purchased Receivables and Collateral (A) to sell, assign, transfer,
pledge, compromise, or discharge the whole or any part of such Receivables; (B)
to demand, collect receive, sue, and give releases for moneys due or which may
become due upon such receivables and to compromise, prosecute, or demand any
action, claim, case, or proceeding relating to such receivables, including the
filing of a claim or the voting of such claims in any bankruptcy case, all in
Purchaser's name or Seller's name, as Purchaser may choose; (C) to prepare, file
and sign Seller's name on any notice, claim, assignment, or satisfaction of lien
or mechanics' lien or similar document; (D) to rectify all account debtors to
pay Purchaser directly; (E) to receive, open, and dispose of all mail addressed
to Seller for the purpose of collecting such Receivables; (F) to endorse
Seller's name on any checks or other forms of payment on receivables; (G) to
sign Seller's name to any form UCC-1 or other document necessary to perfect any
security interest granted by Seller to Purchaser; (H) to complete, execute and
file any franchise tax return or other document necessary to qualify Seller to
do business in any state which Purchaser deems necessary to enforce collection
of Receivables, and to pay on Seller's behalf any taxes or fees which may be due
by Seller in connection therewith (all such fees and dues shall be added to the
Account Balance); and (I) to do all acts and things necessary or expedient in
furtherance of any such purpose.
6. Representations, Warranties & Covenants To induce Purchaser to render its
services available to Seller, and with full knowledge that the truth and
accuracy of the following are being relied upon by the Purchaser in determining
whether to accept purchase Receivables the Seller represents, warrants,
covenants, and agrees, with respect to each Transmittal Sheet delivered to
Purchaser, then:
6.1 The Seller is the absolute owner of each receivable set forth in each
Transmittal Sheet and has full legal right to make said sale, assignment and
transfer thereof;
6.2 The correct amount of each Receivable is as set forth in the
Transmittal Sheet and is not in dispute.
6.3 The payment of each receivable is not contingent upon the fulfillment
of any obligation or contract, past or future, and any and all obligations
required of the Seller have been fulfilled as of the date of each Transmittal
Sheet;
6.4 Each Receivable set forth in a Transmittal Sheet is based on an actual
sale and delivery of goods and/or services actually rendered, is presently due
and owing to Seller, is not past due or in default, has not been previously
sold, assigned, transferred, or pledged, and is free of any encumbrance or lien
except to Purchaser.
6.5 There are no defenses, offsets, or counterclaims against any of the
Receivables, and no agreement has been made under which the Account Debtor may
deem any deduction or discount, except as otherwise stated on each invoice
submitted to Purchaser which is listed on the Transmittal Sheet;
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6.6 Each Purchased Receivable shall be the property of the Purchaser and
shall be paid directly to Purchaser, but if for any reason it should be paid to
Seller, Seller shall promptly notify Purchaser of such payment, shall void any
checks, drafts, or moneys so received in trust for the benefit of Purchaser, and
shall promptly transfer and deliver the same to the Purchaser.
6.7 Purchaser shall have the right to endorse, and also the right to
require endorsement by Seller, on all payments received in connection with each
Purchased Receivable and any proceeds of Collateral.
6.8 The Seller, and to Seller's best knowledge, each account Debtor set
forth in the Transmittal Sheet is and shall remain solvent as that term is
defined in the Federal Bankruptcy Code.
6.9 Each Account Debtor named in the Transmittal Sheet will not object to
the payment for or the quality or quantity of the subject matter of the
Receivable and is liable for the amount set forth on the Transmittal Sheet.
6.10 Each Account Debtor shall be promptly notified after acceptance by
Purchaser that the Purchased Receivable has been transferred to and is payable
to Purchaser, and Seller shall not take or permit any action to countermand such
notification.
6.11 The Seller's place of business, and the place where records concerning
all Receivables herein referred to are kept, is the one set forth at the
beginning of the Agreement, and Seller will promptly advise Purchaser in writing
if such place of business or record keeping is changed or a new place of
business or record keeping is added.
6.12 Sell is not and will not hold any letter of credit or negotiable
instrument as support for or in payment of any Purchased Receivable, and any
such documentation received by Seller will be immediately turned over to
Purchaser, with any necessary assignment or endorsement.
6.13 Seller will not assign, transfer, sell, or grant any lien or security
interest in the Collateral to any other party without Purchaser's prior written
consent and
6.14 No Account Debtor is affiliated with Seller, either by common
ownership or family relationship.
6.15 All Receivables forwarded to and accepted by Purchaser after the date
hereof, and thereby becoming Purchased Receivables, shall comply with each and
every one of the foregoing representations, warranties, covenants, and
agreements referred to above in this Section 6.
7. Adjustments. In the event of a breach of any of the representations,
warranties, or covenants set forth in Section 6, or in the event any adjustment
or dispute is asserted by any Account Debtor, Seller shall promptly advise
Purchaser and shall, subject to the Purchaser's approval, resolve such disputes
and advise Purchaser of any adjustment. Unless reassigned to Seller, Purchaser
shall remain the absolute owner of any Purchased Receivable, which is subject to
Adjustment or Repurchase under Sections 1.3 or 4 hereof, and any rejected,
returned, or recovered personal property, with the right to take possession
thereof at any time. If such possession is not taken by Purchaser, Seller is to
resell it for Purchaser's account at Seller's expense with the proceeds made
payable to Purchaser. While Seller retains possession of said returned goods,
Seller shall segregate said goods and mark them "property of Financial Accounts
Management Services."
8. Security Interest
8.1 This Agreement for Purchase of Receivables is the security agreement
referred to in the Transmittal Sheet.
8.2 In order to secure the Obligations, Seller hereby grants to Purchaser a
continuing lien upon and security interest in all Seller" now existing or
hereafter ensuing rights and interest in the Collateral.
8.3 Seller is not authorized to sell, transfer, or otherwise convey any
Collateral without Purchaser's consent, except for the sale of finished goods
inventory in the Seller's ordinary course of business. Purchaser shall have the
right, upon default by Seller hereunder, to withdraw its consent to Seller's
sale of finished goods inventory, and Seller agrees that Purchaser may notify
the Account Debtors of this withdrawal of consent.
8.4 Seller agrees to sign all UCC financing statements required by and in a
form satisfactory to Purchaser.
8.5 Purchaser shall have the right at any time to notify Seller's Account
Debtors of its security interest. Email notification may be in the form of
Exhibit A hereto: (Italicized verbiage crossed out, initialed, and dated.)
9. Default
9.1 The following shall constitute Events of Default:
9.1.1 Seller fails to pay as when due any Obligations owed to Purchaser.
9.1.2 There shall be commenced by or against any Obligor any voluntary or
involuntary case under the Federal Bankruptcy Code, or any assignment for the
benefit of creditors or appointment of a receiver or custodian for a substantial
portion of its assets.
9.1.3 Any Obligor shall become insolvent in that its debts are greater than
the fair value of its assets, or such entity is generally not paying its debts
as they become due.
9.1.4 Any involuntary lien, levy, garnishment, attachment or the like is
issued against or attaches to the Purchased Receivables or the Collateral and
the same is not released within ten (10) days, or
<PAGE>
9.1.5 Seller shall breach any covenant, agreement, warranty, or
representation set forth herein, and the same is not cured to Purchaser's
satisfaction within ten (10) days after Purchaser has given Seller oral or
written notice thereof.
9.2 Upon the occurrence of an Event of Default.
9.2.1 Without implying the existence of any obligation to Purchaser to buy
receivables, which implication is specifically negated by the terms hereof,
Purchaser may cease buying Receivables.
9.2.2 Purchaser may immediately exercise its rights and remedies with
respect to the Purchased Receivables and Collateral, as a secured party under
this Agreement, the uniform Commercial Code, and applicable law.
9.2.3 Purchaser shall have the rights as set forth in Section 8 hereof.
10. Nonpayment of Obligations. If any Obligation is not paid when due (including
amounts due under Section 3.11, Repurchase Amounts due under Section 4, or
professional fees and expenses under Section 11), such amount may be added to
the Account Balance and shall be subject to the Factor Fee rate until payment in
full.
11. Professional Fees. The Seller will pay all reasonable fees and expenses of
attorney's and other professionals that Purchaser incurs in negotiating,
amending, and enforcing this Agreement and protecting or enforcing its interest
in the Purchased Receivables or the Collateral, in collecting Purchased
Receivables, or in the representation of the Purchaser in connection with any
bankruptcy date or insolvency proceeding involving Seller, the Collateral, any
Account Debtor, or any Purchased Receivable.
12. Severabilty and Choice of Law. In the event that any provision of this
Agreement is deemed invalid by reason of Law, this Agreement will be constituted
as not containing such provision and the remainder of the Agreement shall remain
in full force and effect. This Agreement has been transmitted by Seller to
Purchaser at Purchaser's office in the State of California and has been executed
and accepted by Purchaser in the State of California. This Agreement shall be
governed by and interpreted in accordance with the laws of the State of
California without reference to choice of law.
13. Account Collection Service. In the event that Purchaser requires that all of
Seller's Receivables be paid to Purchaser subject to Purchaser's rights in the
Collateral. Purchaser agrees to remit the amount of collections on the
Receivables it receives and does not own to Seller after deducting a handling
fee of $0.00 of such amount received. It is understood and agreed by Seller that
this Section does not impose any affirmative duty on Purchaser to do any act
other than to turn over such amounts. All such Receivables and collections are
Collateral and in the event of Seller's Default hereunder. Purchaser shall have
to duty to remit collection of Collateral and may apply same to the Obligations
until said Default is cured.
14. Term and Termination. The term of this Agreement shall be for one (1) year
from the date hereof, and from year to year thereafter unless terminated in
writing by Purchaser or Seller. Seller and Purchaser each have the right to
terminate at any time provided that there is no outstanding Account Balance and
no fees, charges or other obligations owed to Purchaser at the time of
termination. Any termination of this Agreement shall not affect Purchaser's
security interest in the Collateral and Purchaser's ownership of the Purchased
Receivables, and this Agreement shall continue to be effective, until all
transactions entered into and Obligations incurred hereunder have been completed
and satisfied in full.
IN WITNESS WHEREOF, the Seller has executed this Agreement on the day and
year above written, and the Purchaser has accepted by its authorized
representative.
SELLER: Celerity Solutions, Inc.
(Signed) L. Kopeikina
BY: ___________________________
Luda Kopeikina
ACCEPTED AT SAN JOSE, CALIFORNIA
FINANCIAL ACCOUNTS MANAGEMENT SERVICES,
A division of Imperial Bank
(Signed) Gary Harrison
BY: ___________________________
Gary Harrison, President
