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 201its 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 [_]
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 August 27, 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]
Exhibit Index Located on Page 51
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CELERITY SOLUTIONS, INC.
MARCH 31, 1999
FORM 10-KSB
TABLE OF CONTENTS
PART I
ITEM 1. DESCRIPTION OF BUSINESS
ITEM 2. DESCRIPTION OF PROPERTY
ITEM 3. LEGAL PROCEEDINGS
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
ITEM 7. CONSOLIDATED FINANCIAL STATEMENTS
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS
ITEM 10. EXECUTIVE COMPENSATION
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
INDEX OF EXHIBITS
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Celerity Solutions, Inc. (Celerity or the Company) has been in existence since
1982, going public in 1992, as Capitol Multimedia, Inc. In 1997, the Company
changed its name to Celerity Solutions, Inc., and transformed itself from a
multimedia publisher to a supply chain software provider. The Company develops,
markets and supports client-server and internet-enabled business software
applications. The Company has no plans to develop new multimedia products in the
foreseeable future. Supply chain management encompasses the planning and control
of material and resources from customer order entry through warehousing and
logistics to customer delivery. The Company's strategy is to provide
state-of-the-art, real-time planning and management capabilities that improve
customer cycle time from order receipt to product delivery, and reduce inventory
costs.
The Company entered into the supply chain sector of the business software market
in March 1997 through the acquisition of Client Server Technologies Inc. (CSTI),
a developer and integrator of supply chain management software. In August 1997,
the Company established Paragon, a limited liability company in St. Petersburg,
Russia as a wholly owned subsidiary. Paragon develops software for the Company,
and has retained the services of 10 technical personnel, some of whom were
employed by the Company's former subsidiary AMI, which was sold in April 1997.
On December 8, 1997, the Company acquired all of the outstanding stock of
Somerset Automation, Inc. (SAI), a privately held warehouse management software
company based in Irvine, California and merged it into a wholly owned
subsidiary, Somerset Solutions, Inc. (Somerset). Somerset is a technology leader
in the warehouse management software market. Somerset's warehousing product,
combined with the Company's existing supply chain management product, creates a
more powerful product line which enables control of inventory and resources not
only between locations in the supply chain but through warehouses as well. This
new capability positions the Company to provide integrated warehouse and supply
chain management software for the middle market.
The Company's products are used by more than 100 organizations in the U.S. and
Europe. These companies represent a variety of industries, including
telecommunications, manufacturing, utilities, and retail. Customers include
Corporate Express, Champion International, Methanex Methanol, Nortel,
Distribution Dynamics, Universal Furniture, Image Entertainment, Wesley Jessen,
Alcatel, United Liquors, and Honeywell.
HISTORY
After going public in 1992 the Company earned an international reputation as a
top quality multimedia developer with critically acclaimed original products.
However, the multimedia industry experienced significant consolidation
commencing in 1996 as product demand dropped in the face of significant over
capacity and limited means of product distribution. The Company determined that
it was unable to successfully compete in this environment. In the fall of 1996,
the Company hired a new management team and after a comprehensive assessment of
the business, management decided to position the multimedia business for sale
and to pursue opportunities in the supply chain management business software
market.
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HISTORY, CONTINUED
Acquisition of CSTI. On March 31, 1997, the Company acquired CSTI for
approximately $3.9 million through the issuance of 1,200,000 shares of common
stock, payments of $1.25 million in cash and issuance of non-interest bearing,
convertible, long-term notes totaling $1.9 million to the sellers, which for
financial accounting purposes were discounted to a value of $1.55 million. The
transaction was accounted for under the purchase method of business
combinations. The acquisition provided the Company an entry into the supply
chain management sector of the business software market. CSTI employed
approximately 35 people with offices in Dedham, Massachusetts; Denver, Colorado;
and Los Angeles, California. Please refer to Item 6, Management Discussion and
Analysis for further discussion on the acquisition.
Sale of selected multimedia assets. On April 16, 1997, the Company sold selected
multimedia assets, including assets relating to its art, animation and audio
production capabilities in St. Petersburg, Russia and Concord, Massachusetts, to
Davidson & Associates, Inc. (Davidson), a division of Cendant, Inc., for
approximately $2.5 million in cash. The gain from this transaction was
approximately $2.0 million. The Company retained all rights to its fourteen (14)
multimedia CD-ROM products currently on the market, three (3) newer CD-ROM
titles, all software tools and engines, and software development capabilities in
the United States and Russia. Please refer to Item 6, Management Discussion and
Analysis for further discussion of this transaction. As a result of this sale,
the Company no longer develops its own multimedia software titles for the
consumer market or provides development services for others, but will continue
to sell existing titles through its current distribution channels. However,
multimedia revenue and related cost of sales represent a small fraction of the
Company's respective amounts which are not material to the business.
Acquisition of SAI. On December 8, 1997, the Company acquired all of the
outstanding stock of SAI, a privately held warehouse management software company
based in Irvine, California by means of a merger between SAI and Somerset, a
wholly owned subsidiary of the Company. As a result of the acquisition, Somerset
has become a technology leader in the warehouse management software market. SAI
had approximately $4.5 million in annual revenue in 1997. The acquisition of SAI
filled a strategic product need for the Company. Somerset's warehousing product,
combined with the Company's existing supply chain management products, creates a
more powerful product line, which enables control of inventory and resources not
only between locations in the supply chain but through warehouses as well. This
new capability positions the Company to provide integrated warehouse and supply
chain management software for the middle market. Somerset's customers include
Corporate Express, Wesley Jessen, Pleasant Company, Bugle Boy Industries, and
Columbia Sportswear. Somerset's warehouse management software, WMS 4.0, is
client-server based, highly flexible, user configurable, and supports single and
multiple facility enterprises.
INDUSTRY BACKGROUND
According to Advanced Manufacturing Research (AMR) the Supply Chain Management
Software Market in 1996 was $1 billion, and is poised for rapid and substantial
growth through 2001. Long-term growth is expected to average over 35% per year
through 2001, and software license fees are expected to grow by a factor of six
times service revenues from $419 million in 1996 to $2.7 billion in 2001. The
market is expected to grow to $6.5 billion by 2001. There are three primary
segments in this market: Supply Chain Planning and Execution; Warehouse
Management Systems, and Transportation Management Systems. Based on license
fees, these three segments represent 65%, 20%, and 15% of the total market,
respectively.
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INDUSTRY BACKGROUND, CONTINUED
AMR identifies four drivers of growth over the next five years, including:
o The ongoing pressure by retailers and other manufacturers to push inventory
back onto the suppliers, combined with the increasing complexity and
tightening of scheduling of orders;
o The competitive advantage gained by early adopters of supply chain
management (SCM) process reengineering imposing a corresponding competitive
necessity on other corporations;
o The increasingly broad selection and availability of packaged SCM
applications, as well as the movement toward integrated end-to-end SCM
suites by vendors lowering the cost of entry and accelerating the pace of
adoption; and
o The push by companies for greater efficiency in the use of their assets,
including inventory and capital equipment.
BUSINESS MODEL
The Company currently offers products and services which meet the needs of
larger manufacturers and distributors for integrated systems which manage the
flow of inventory from supplier to customer. The solution provided is unique for
each customer. Revenues are generated from product license fees, professional
service fees and ongoing product support.
CUSTOMER INTEGRATION SERVICES
Due to the complexity of customer hardware and software environments, it is
often necessary to develop interfaces between the Company's supply chain
management products and the existing software in the customer's environment. If
a customer has needs that are specific to their business, it is often necessary
to develop additional functionality to satisfy these needs and make the
Company's products more effective in the customer's environment. The Company
believes that providing such technical support and project management to its
supply chain management customers is important for successful product
implementation and instrumental to continued license sales and revenue growth.
The Company intends to continue to provide such services in the future. The
Company generally provides these and other product-related services on a time
and material basis. Professional services revenues made up 80% of total revenues
in fiscal 1999.
LICENSE AND SUPPORT AGREEMENTS
Software product license revenues consist principally of fees generated from the
sale of nonexclusive, nontransferable, perpetual licenses, which are primarily
computer, site, and or user specific. The Company believes that packaging its
products is critical to continued license sales and revenue growth. One focus of
the Company's development efforts in Fiscal 2000 is to package the warehousing
and supply chain planner products. Annual software support and maintenance
agreements are sold at approximately 15% of the current list license prices.
Professional services revenues made up 11% of total revenues in fiscal 1999.
HARDWARE AND THIRD PARTY LICENSE FEES
The Company often sells radio frequency equipment, bar code scanners and other
devices in conjunction with it Warehouse Management product. In addition,
software developed by other companies is sometimes resold by Celerity as part of
a distributor agreement. Revenues in these areas made up 9% of total revenues in
fiscal 1999.
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PRODUCTS
The Company offers supply chain management software solutions and integration
services for distribution, planning, warehousing and financial functions within
a business to increase productivity, reduce inventory and improve planning and
control. Its Products utilize a client-server architecture. The "client" manages
the graphical presentation of information to the user. It can be any computer
running Microsoft's Windows or Windows NT operating systems. The "server"
processes business transactions. It operates on computers running Unix or
Microsoft's NT operating system, and uses the Oracle database management system.
The Company's products are grouped into three areas: planning, operations and
finance, and warehousing. Special modules by area follow:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
PLANNING Operations /Financials WAREHOUSING
- ---------------------------------------------------------------------------------------
<S> <C> <C>
o Demand Planning o Sales Order Management o Inventory Control
o Supply Chain Planning o Purchase Order Management o Inventory Maintenance
o Transportation Planning o Accounts Receivable o Inventory Management
o Accounts Payable o Inbound Processing
o Materials Request o Outbound Processing
Management o Workload Management
o Available to Promise
o Sales Analysis
- ---------------------------------------------------------------------------------------
</TABLE>
Planning - the planning modules offer true real-time continuous planning. The
Supply Chain Planner (Planner) is based on patented methodology. The Planner
provides a real-time view of the entire supply chain, optimizes supply in
response to demand, coordinates all planning and execution activities, and
allows the user to react to user defined exceptions. These modules are fully
integrated with the Company's other products.
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PRODUCTS, CONTINUED
Operations/Financials - The Sales Order Management module allows order
processing in a variety of ways that are specific to customers. Proprietary
tools, such as Order Type Configurator, allow customization without custom
coding. Inventory Planning and Control provides support for multi-warehouse,
multi-location operations and helps customers to identify and execute cost
reduction initiatives across the supply chain. Purchase Order Management allows
customers to focus on vendor management and price negotiations rather than
administrative processing by providing consolidated information. Proprietary
tools allow customization with limited coding requirements. Financial Management
allows customers to process accounts receivable, accounts payable and general
ledger activity relative to their business transactions. Financial Management
modules are fully integrated with the rest of the products and reflect changes
made throughout the supply chain in an effective and accurate manner.
Warehousing - Key features include increased inventory management capabilities,
running multiple business divisions and warehouses from one version of the
warehousing software on a single server, and maximized worker productivity
through directed, "task-based" distribution operations. Other features include
user-friendly querying and reporting tools to schedule, manage, and report on
distribution resources, orders, and inventory; Radio Frequency (RF) as well as
paper-based operations; increased flexibility and productivity through
paperless, real-time RF task dispatching; integrated shipping and manifesting;
real-time integration with automated material handling system and maximum
inventory visibility for customer service and purchasing through instantaneous
updating with business host systems.
The Planning and Operations/Financial modules support multiple currencies,
positioning them for today's global environment. During the fiscal year ended
March 1999, the sales prices of the Company's software license fees generally
ranged from $100,000 to approximately $500,000. The price for the individual
product package is determined based on a number of factors, including the number
of users, the number of sites in the customer's business model and the
complexity of the customer's operation.
PRODUCT DIFFERENTIATORS
To reduce cycle time and inventory investment in the whole supply chain,
companies must have the ability to:
o Plan inventory purchase decisions based on timely, accurate information
about demand, existing supply, production capacity and lead times to
delivery;
o Execute purchases, deliveries, customer orders, shipments and collections
in a timely, efficient manner; and o Manage and control inventory,
transportation and labor resources throughout the supply chain.
The Company believes its products provide the ability for customers to achieve
improved cycle time and reduced inventory investment and are differentiated from
its competitors products based on the following capabilities:
Supply Chain Planning. The Company's products provide a real-time view of the
entire supply chain based on a patented continuous planning model methodology.
This allows customers to match demand with supply more accurately and on a
timely basis, thus reducing the amount of inventory needed and the lead time for
delivery of inventory to fulfill customer orders.
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PRODUCT DIFFERENTIATORS, CONTINUED
Sales Order Management. The Company's products provide for unique order type
configuration without programming. This capability enables the definition and
handling of an unlimited number of different order types and the flow of orders
through the enterprise, which is critical to many businesses.
Warehouse Management System. The Company's products provide real-time
information on activity throughout the warehouse infrastructure. This allows for
constant adjustment to labor and workload resources, enables the optimization of
warehouse productivity and reduces the cycle time for customer shipments. The
software enables customers to realize added value through functionality that
provides advanced inventory optimization strategies.
Accurate Information about the Supply Chain. The Company's products provide the
ability to propagate changes at all levels in the supply chain immediately after
a change is made. This allows managers to have accurate integrated information
that facilitates fast strategic and tactical decision making.
Available to Promise. The Company's products provide the ability to accurately
promise order delivery for a certain date that is enabled by the real-time
nature of our product.
Ease of Installation. The Company's products provide full product integration
that utilizes sophisticated tools to simplify the installation and allow
customization in a fast and efficient manner.
Scalability. The Company's products allow customers to divide their operations
into domains for the purposes of planning. This capability allows customers to
plan effectively for international and geographically dispersed organizations
and to add or delete domains as the business grows.
COMPANY STRATEGY
The Company's goal is to become a leading supplier of supply chain execution
software. AMR Research defines supply chain execution as spanning Sales Order
Entry, Inventory Management, Transportation and Warehouse Management
applications. According to AMR, the integration of planning and execution system
is necessary to deal with logistics challenges brought on by the move to
electronic commerce. These challenges include more sales channels, increased
supply alternatives, shorter product and promotion life cycles. Again according
to AMR, no software vendor offers a suite of integrated applications covering
supply chain execution. The Company has products in each area and will spend the
next year focusing on product integration and adding capabilities which reduce
the time and effort to implement these products. This is what is referred to
below as "packaging".
Our Vision - Electronic Supply Chain Collaboration "e-chain".
The Internet eliminates one of the major barriers to collaboration - data
communication. Businesses are rapidly connecting to the Internet. Once
connected, all communication is virtually free. Network maintenance is a
non-issue and the Internet is highly reliable. As you would expect, software
vendors are lining up to exploit this capability. Electronic ordering and order
status tracking is already offered by several competitors.
We believe the next major use of the Internet will be real-time planning and
collaboration among trading partners. The Internet will allow communities of
trading partners to share forecasts, inventory availability, supply plans and
other information. Partner integration will drive down inventory levels and
improve customer service. Our strategy is to extend our applications into this
high growth area. Leverage The Real-time Planner
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COMPANY STRATEGY, CONTINUED
Our real-time planner will be the core of this strategy. Our planner was
developed to communicate with ERP systems and other planning tools over the
Internet. Its calculation engine is based on a patented methodology allows it to
continually evaluate the plan and suggest intervention as conditions change in
the ERP system. We believe this architecture puts us ahead in the race to
develop an integrated supply chain execution system providing real time
collaboration among trading partners over the Internet.
Add Collaboration Tools To Our WMS and Order Management Applications
Our order systems and warehouse management systems will become Internet enabled.
Support for XML and Biztalk will be added to all order management modules
allowing trading partners to electronically share order documents. Integration
between our Global Ship transportation module and our warehousing system will
extend to the Internet. Shipment status information will be retrieved from the
Internet. This will allow us to improve Inbound planning and dynamically revise
supply plans as scheduled receipt dates change.
Move To Web Hosted Applications
In the coming year the Company plans to begin offering a Web Hosted alternative
for selected Celerity products. Web hosting reduces the cost and time required
to install and implement new applications. Provided a company has Internet
access, the only cost of implementing a web hosted application is the training
and licensing costs. This approach also facilitates collaboration by allowing
applications to communicate in real-time.
There can be no assurance that the Company will be able to anticipate, evaluate,
and adapt to changes in platforms and evolving technologies, or to do so in a
timely or cost effective manner.
GROWTH ENABLERS
Invest In Sales and Marketing. The Company intends to continue to expand its
sales and marketing efforts. The Company believes that these investments are
necessary and critical to capitalize on the growth in the supply chain
management software market.
Invest In Product Packaging. Generally, implementation of a total solution for a
customer involves substantial training, customization, data conversion and
product integration services. The capacity to provide these services is limited.
Significant lead time and expense is required to recruit, hire and train new
resources. The Company will invest in software and processes which reduce the
services requirement. These will include automated installation procedures,
improved training materials and new documentation.
Build Alliances with Consultants and Complementary Application Providers The
Company's product is designed in a modular way and allows easy integration with
other vendor's applications. The Company intends to continue to pursue strategic
alliances with software vendors offering complementary products. In addition,
the Company intends to establish joint marketing agreements with regional
consulting firms with an established supply chain practice.
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COMPANY STRATEGY, CONTINUED
Continue To Focus On The Middle Market The Company is currently focused on the
middle market of manufacturers and distributors with revenues ranging from $200
million to $1 Billion.
There can be no assurance that the Company will be able to expand its marketing,
sales, support and service organizations or develop additional distribution
channels on a timely basis.
The Company's supply chain management software product development process
includes design, requirements definition, software programming, and quality
assurance. On-going product development efforts are focused on the enhancement
of the features and functionality of existing products including additional
Internet capabilities, interfacing and integrating product modules, "packaging"
of the warehousing and Supply Chain Planner products and developing tools and
techniques for ease and speed of product implementation.
PRODUCT DEVELOPMENT
Research and Development. The Company has made significant product development
expenditures that it believes are necessary for it to deliver new product
features and functions. The Company's development cost for its supply chain
products were $879,064 and $ 1,707,325 in Fiscal 1998 and 1999, respectively.
The Company works closely with its internal sales, marketing, and service staff,
and externally with customers to develop new products and enhancements that meet
their needs. Product development and documentation is done internally.
Future Product Development. The Company expects to limit new development to NT,
Unix and Oracle operating environments. As a result, the Company expects to
reduce resources allocated to product development in Fiscal 2000 and intends to
reallocate research and development personnel to billable projects.
Sources of Supply and Governmental Regulations. The Company is not dependent on
the sources and availability of any new materials needed to produce its
products. The Company does not believe that it will experience any adverse
effect from existing or probable government regulations. Further, the Company is
not currently planning to seek any government approval for principle products or
services. Lastly, the Company is not effected by any current or pending
environmental laws.
Production Facilities. The Company operates a subsidiary to develop software in
St. Petersburg, Russia. The economic conditions in Russia, including lower wage
rates and lower standards of living, allow the Company to transact business in
St. Petersburg at a relatively low cost structure. The Company's presence in
Russia represents 13% if its work force as of the end of fiscal 1999 thus any
change in these conditions is not expected to significantly affect the Company.
SALES, DISTRIBUTION AND MARKETING
The Company sells its supply chain management software and services primarily
through its direct sales organization. The Company conducts sales through its
offices in Dedham Massachusetts, and Irvine California; and through field sales
personnel in the Chicago and New York City metropolitan areas. The sales process
usually consists of prospect identification, prospect validation, sales
presentations and product demonstrations, proposals and system design studies.
The system design studies are consulting projects, which are small in scope and
result in providing customers a more definitive project plan, timetable and
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cost estimate. The Company plans to expand its sales and marketing support
organizations in Fiscal 2000.
SALES, DISTRIBUTION AND MARKETING, CONTINUED
The Company supports its supply chain management sales activities by conducting
a variety of marketing activities, including appearances at industry trade shows
and conferences such as those organized by the American Production and Inventory
Control Specialists (APICS) and the Council of Logistics Management (CLM). In
addition the Company conducts lead generation programs including advertising,
direct mail, telemarketing, and public relations.
COMPETITION
The Company's supply chain management products are addressing the needs of the
growing market for supply chain management software solutions. The Company's
competitors include small and large companies which offer various solutions in
different segments of the supply chain. Many of the vendors in this market, such
as SAP, Manugistics, BAAN, and Oracle, have longer operating histories, larger
customer bases, better name recognition, significantly greater financial,
technical, marketing and distribution resources than the Company.
COMPETITION , CONTINUED
The Company is currently focused on the middle market of manufacturers and
distributors with revenue ranging from $200 million to $1 Billion. The Company
expects to compete successfully in this market for the following reasons:
o The Company is one of the few vendors offering a full range of products to
meet customer needs. In a market full of niche players and with customers
demanding integrated, easy to implement solutions from a single vendor, the
Company believes it is well positioned to compete in this market. This
"packaged" approach minimizes the need for custom integration services and
allows customers to realize benefits faster than the competition;
o The Company's unique, patented real time planner and the other product
differentiators described above;
o The Company's focus on the middle market enables the Company to progress
towards delivering a price sensitive, affordable solution that addresses
the needs of customers in this market.
To the extent larger competitors either acquire or develop products with
functionality comparable to the Company's products and are able to offer them to
the middle market at competitive prices, their integrated solutions can provide
a significant competitive advantage over the Company. There can be no assurance
that the Company will be able to compete successfully with existing or new
competitors or that competition will not have a material adverse effect on the
Company's business, operating results and financial condition.
PROPRIETARY RIGHTS
The Company regards the software it develops and owns as proprietary and relies
primarily on a combination of copyrights, trademarks, trade secret laws,
employee and third-party nondisclosure agreements and other methods to protect
its proprietary rights. The Company has registered trademarks in the United
States for certain of its product names and has pending trademark applications
for certain additional product names. The Company believes that trademarks and
copyrights are important, but less significant to the Company's success than
factors such as the knowledge, ability, and experience of the Company's
personnel, research and development, brand name recognition, and product
loyalty.
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PROPRIETARY RIGHTS, CONTINUED
Most of the Company's products do not include any mechanisms to prevent or
inhibit unauthorized copying, nor does the Company rely on shrink-wrap licenses,
which restrict copying and use of the products. The Company is aware that
unauthorized copying occurs within the software industry; however, policing
unauthorized use of the Company's products is difficult. While the Company is
unable to determine the extent to which software piracy of its products exists,
software piracy is expected to be a persistent problem.
The Company believes that its products, trademarks, and other proprietary rights
do not infringe on the proprietary rights of third parties. As the number of
software products increases and the functionality of these products further
overlaps, software developers may become increasingly subject to infringement
claims. There can be no assurances that third parties will not assert
infringement claims against the Company with respect to current or future
products, or that any such assertion may not require the Company to enter into
royalty arrangements or result in costly litigation.
The Company is party to a license agreement which allows it to use a patented
methodology in its Supply Chain Planner product.
QUARTERLY FLUCTUATIONS
The level of net sales realized by the Company in any quarter is principally
dependent on the number of sold new supply chain management software licenses.
The purchase of supply chain management solutions requires a significant
commitment of capital and resources on the part of the customer, the sales
cycles are long and average from six to nine months. As a result, revenue
recognition is subject to many risks that are not controllable by the Company
such as budgetary cycles, changes in the business of a customer and overall
economic trends. Quarterly results have varied significantly in the past and are
likely to fluctuate in the future as a result of new order timing. From time to
time, the Company may record very large individual license and or hardware
sales, which can cause significant variations in quarterly results. A
significant portion of the Company's operating expenses are fixed and planned
expenditures in any given quarter and are based on sales and revenue forecasts.
Accordingly, if net sales do not meet the Company's expectations in any given
quarter, operating results and financial condition could be adversely and
disproportionately affected because a significant portion of the Company's
expenses do not vary with revenues. As a result of these and other factors, the
Company's results of operations and financial condition for any period are
inherently difficult to predict. Any significant change from levels expected by
securities analysts or shareholders could result in substantial volatility in
the trading price of the Company's common stock.
EMPLOYEES
As of May 31, 1999 the Company employed 71 people on a full-time basis. None of
the Company's employees are represented by a labor union or bound by a
collective bargaining agreement. The Company has never suffered a work stoppage.
The Company believes its future success will depend, in part, upon continued
service of a small number of key technical and senior management personnel and
on its continued ability to recruit and retain highly-skilled management and
technical personnel. Competition for such employees is intense and the loss of
services of key personnel could have a material adverse effect on the Company's
operating results and financial condition. There can be no assurance that the
Company will retain its key managerial and technical employees or that it will
be successful in attracting and retaining other highly-skilled managerial and
technical resources.
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COMPLEXITY OF SOFTWARE PRODUCTS
The market for the Company's software products requires continuous upgrades due
to technological advances, introductions of new hardware platforms and operating
systems, changes in customer requirements and frequent new product
introductions. The Company's future success will depend on its ability to
continue to upgrade its products taking these changes into consideration. There
can be no assurance that the Company will be successful in developing and
marketing such new products on a timely and cost-effective basis. The Company's
failure to successfully develop and market new products and enhancements that
keep pace with the advances of the market could have a material adverse effect
on the Company's business, operating results and financial condition. The
Company's supply chain management products are very complex due to its
client/server architecture, depth of the functionality and the number of modules
and interdependencies among them. Given such product complexity, the Company's
new products may have undetected errors that would not have been found until the
installation of the product at a customer's site despite rigorous testing of the
product by the Company. Even though such infrequent occurrences have not had a
material adverse impact on the Company's business in the past, there can be no
assurance that delays related to error correction will not have a material
adverse impact on the Company's financial condition in the future.
YEAR 2000 COMPLIANCE ISSUES
Many older computer systems and software products in use today were programmed
with a two digit date code field. These systems or software products need to be
modified, upgraded or replaced to distinguish the year 2000 ("00") as occurring
after the year 1999 ("99") in order to avoid the possibility of erroneous
results or system failures. The effects of this issue and the efforts by
companies to address it are uncertain.
Many Companies are expending significant resources to modify or upgrade their
existing software and hardware for year 2000 compliance. This might reduce funds
available to purchase other software products such as the Company's supply chain
management software. Additionally, Year 2000 problems in a customer's other
software products might significantly limit the customer's realized benefit from
the supply chain management software. These events could result in a material
adverse effect on the Company's business, operating results, financial condition
and cash flows.
The Company utilizes outside providers for services such as payroll processing
and 401(k) benefit administration, third party vendor equipment, and various
software products which may or may not be year 2000 compliant. The Company has
addressed the issue and taken steps to make sure that all such exposure is
eliminated, but failure of any critical technological component to operate
properly may have an adverse impact on business operations or require the
Company to incur unanticipated expenses to remedy any problems.
The Company's software products have been modified to be year 2000 compliant.
However, the Company's products are complex and might contain undetected errors
or failures even though intended to be year 2000 compliant. There can be no
assurance that the Company's software products contain or will contain all
necessary date code changes or that errors will not be found in new products or
product releases, resulting in loss of or delay in product acceptance. If the
Company is unable, or is delayed in its efforts to make the necessary date code
changes, there could be a material adverse effect upon the Company's business,
operating results, financial condition and cash flows.
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ITEM 2. DESCRIPTION OF PROPERTY
The Company leases approximately 15,000 square feet of office space in Bethesda,
Maryland, pursuant to a non-cancelable lease expiring in April, 2004 with an
option to renew for one additional five-year term. In 1996, the Company decided
to relocate its headquarters from Bethesda, Maryland to Concord, Massachusetts.
And as a result has sublet approximately 7,000 square feet through March, 2000
and approximately 8,000 square feet through the remainder of the lease term
(April, 2004). The Company's subsidiary located in St. Petersburg, Russia
sub-leases approximately 1,000 square feet on a month-to-month basis.
On March 31, 1997, the Company acquired CSTI and consolidated its operations
with CSTI's facilities in 1998. The Company is currently operating out of two
(2) locations: Dedham, Massachusetts (approximately 8,000 square feet on a
three-year, non-cancelable lease expiring October, 1999); and Irvine, California
(approximately 10,000 square feet of space on a five-year, non-cancelable lease
expiring November, 2003).
ITEM 3. LEGAL PROCEEDINGS
The Company is not party to, nor is it aware of, any threatened litigation of a
material nature.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the quarter
ended March 31, 1999.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the NASDAQ Small-Cap Market System under
the symbol CLTY. The Company has been notified by NASDAQ that it intends to
delist the Company's Common Stock for failure to meet NADAQ listing requirements
for net asset value and share price. The Company has appealed NASDAQ's Notice of
Delisting. If the Company's Common Stock is delisted, the Company expects that
it will continue to be traded as a bulletin board stock over the counter.
The Company's Warrants, which were previously traded on the NASDAQ Small-Cap
Market System, were delisted during the year and currently trade as a Bulletin
Board stock over the counter. The following table sets forth, for the periods
indicated, the high and low sales prices for the Company's Common Stock as
reported by NASDAQ:
HIGH LOW
Fiscal Year Ended March 31, 1999
First Quarter $ 2.938 $ 1.625
Second Quarter $ 2.25 $ 1.00
Third Quarter $ 1.625 $ .594
Fourth Quarter $ 1.188 $ .344
Fiscal Year Ended March 31, 1998
First Quarter $ 2.250 $ .938
Second Quarter $ 2.469 $ 1.063
Third Quarter $ 1.875 $ 1.313
Fourth Quarter $ 1.750 $ .938
The above over-the-counter market quotations reflect inter-dealer prices,
without retail mark-ups, mark-downs, or commissions and may not represent actual
transactions.
The Company has not paid cash dividends on its common stock since its
organization and does not intend to pay any cash dividends in the foreseeable
future. As of May 31, 1999, the Company had approximately 128 shareholders of
record and approximately 1,250 beneficial shareholders.
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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 a director of Sapiens
International Corporation, N.V., (NASDAQ: SPNS), a developer of mainframe
database tools. Previously, Mr. Leach was partner of the Boston
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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.
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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.
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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 and
$125,012 of third quarter R&D costs related to the Unix/Oracle version of the
WMS software. Both of the projects 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.
In-process R&D projects are presented below and are grouped by each entity
acquired.
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 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.
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RESEARCH AND DEVELOPMENT, CONTINUED
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.
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.
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 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
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SALES AND MARKETING, CONTINUED
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 AND DEVELOPMENT
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, and $3,094,527
of purchased in-process research and development which was written-off at
December 8, 1997.
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.
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 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
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PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT, CONTINUED
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 of individual assets for
the Somerset acquisition were; Developed Technology - 25%, In-Process Technology
- - 30%, and Trade Name and Trademark - 30%. "
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.
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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 that these
financing sources will be available or if available will be available at a
reasonable cost.
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<PAGE>
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.
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
24
<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.
25
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Celerity Solutions, Inc.
We have audited the accompanying consolidated balance sheets of Celerity
Solutions, Inc. as of March 31, 1999 and 1998, and the related consolidated
statement of operations, shareholders' equity, and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Celerity
Solutions, Inc. at March 31, 1999 and 1998, and the consolidated results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
Boston, Massachusetts
June 11, 1999, except for Note 16, as to which the date is July 13, 1999
26
<PAGE>
Celerity Solutions, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
March 31
1999 1998
------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 401,376 $ 1,347,246
Short-term investments 13,251 994,384
Accounts receivable, less allowance of $230,000 and
$158,600 for 1999 and 1998, respectively 2,774,327 2,200,754
Income taxes receivable 42,301 -
Notes receivable from related parties 98,711 -
Notes and guaranteed royalties receivable 12,500 1,159,893
Prepaid expenses and other current assets 125,915 109,649
------------------------------------------
Total current assets 3,468,381 5,811,926
Property and equipment, net 622,984 568,673
Capitalized software, net of accumulated amortization of
$263,968 and $85,992 for 1999 and 1998, respectively 785,923 803,887
Notes receivable from related parties - 117,999
Goodwill, net of accumulated amortization of
$241,281 and $102,198 for 1999 and 1998, respectively 995,017 1,134,100
Other assets 84,057 9,057
------------------------------------------
Total assets $ 5,956,362 $ 8,445,642
==========================================
</TABLE>
See accompanying notes.
27
<PAGE>
Celerity Solutions, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
March 31
1999 1998
-------------------------------------------
<S> <C> <C>
Liabilities and shareholders' equity Current liabilities:
Accounts payable and accrued expenses $ 2,437,361 $ 1,287,750
Income taxes payable - 507,577
Current portion of notes payable to related parties 593,318 1,100,797
Short-term notes payable 199,186 41,480
Unearned revenue and other current liabilities 391,684 453,160
-------------------------------------------
Total current liabilities 3,621,549 3,390,764
Notes payable to related parties 1,019,952 1,178,050
Deferred rent 62,406 70,689
-------------------------------------------
Total Liabilities 4,703,907 4,639,503
Shareholders' equity:
Common stock, $.10 par value, 25,000,000 and
10,000,000 shares authorized;
9,592,886 and 8,842,886 shares issued
and outstanding for 1999 and 1998 respectively. 959,289 884,289
Additional paid-in capital 19,038,245 18,900,290
Accumulated deficit (16,818,985) (13,928,096)
-------------------------------------------
3,178,549 5,856,483
Less treasury stock, at cost, 775,088 and 825,088 shares at
March 31, 1999 and 1998, respectively (1,926,094) (2,050,344)
-------------------------------------------
Total shareholders' equity 1,252,455 3,806,139
-------------------------------------------
Total liabilities and shareholders' equity $ 5,956,362 $ 8,445,642
===========================================
</TABLE>
See accompanying notes.
28
<PAGE>
Celerity Solutions, Inc.
Consolidated Statements Of Operations
<TABLE>
<CAPTION>
Year ended March 31
1999 1998
------------------------------------------
<S> <C> <C>
Revenue:
Services $ 9,201,280 $ 5,299,723
Software licenses 1,224,131 749,996
Hardware and third party license fees 1,040,972 128,594
------------------------------------------
Total revenue 11,466,383 6,178,313
Cost of Sales:
Services 5,852,863 3,313,782
Amortization of capitalized software 177,976 85,993
Hardware and third party license fees 891,917 98,847
------------------------------------------
Total cost of sales 6,922,756 3,498,622
Gross margin 4,543,627 2,679,691
Operating expenses:
Research and development 1,707,325 879,064
General and administrative 2,587,118 1,582,505
Sales and marketing 2,981,215 831,113
Purchased in-process research and development - 3,208,744
Amortization of goodwill 139,083 102,198
Restructuring expense 439,277 -
------------------------------------------
Total operating expenses 7,854,018 6,603,624
------------------------------------------
Operating loss (3,310,391) (3,923,933)
------------------------------------------
Other income (expense):
Interest and other income, net 114,685 240,559
Interest expense (218,361) (206,245)
Gain on sale of assets - 2,037,104
------------------------------------------
Loss before taxes (3,414,067) (1,852,515)
Income tax benefit (expense) 523,178 (142,500)
------------------------------------------
Net loss ($ 2,890,889) ($ 1,995,015)
==========================================
Loss per common share:
Net loss per share - basic and diluted $ (.36) $ (.30)
==========================================
Weighted average shares outstanding 8,033,825 6,656,882
==========================================
</TABLE>
See accompanying notes.
29
<PAGE>
Celerity Solutions, Inc.
Consolidated Statements of Shareholders' Equity
<TABLE>
<CAPTION>
Common Stock Additional
Par Paid-in Treasury Stock Accumulated
Shares Value Capital Shares Cost Deficit Total
------ ----- ------- ------ ---- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1997 6,857,153 $685,715 $16,747,202 (825,088) ($2,050,344) ($11,933,081) $3,449,492
Issuance of common
stock for acquisition of
Somerset Automation, Inc. 1,958,233 195,824 2,118,025 2,313,849
Stock option exercise 27,500 2,750 35,063 37,813
Net loss (1,995,015) (1,995,015)
---------------------------------------------------------------------------------------------------
Balance at March 31, 1998 8,842,886 $884,289 $18,900,290 (825,088) ($2,050,344) ($13,928,096) $3,806,139
Issuance of treasury
stock in exchange for
consulting services (87,045) 50,000 124,250 37,205
Issuance of common stock
to retire notes payable 750,000 75,000 225,000 300,000
Net loss (2,890,889) (2,890,889)
---------------------------------------------------------------------------------------------------
Balance at March 31, 1999 9,592,886 $959,289 $19,038,245 (775,088) ($1,926,094) ($16,818,985) $1,252,455
===================================================================================================
</TABLE>
See accompanying notes.
30
<PAGE>
Celerity Solutions, Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended March 31
1999 1998
---------------------------------------------
<S> <C> <C>
Operating activities:
Net loss $ (2,890,889) $ (1,995,015)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation 272,572 222,459
Amortization of goodwill and capitalized software 317,059 188,191
Provision for doubtful accounts 1,347,401 53,171
Write-off of in-process research and development from 3,208,744
acquisitions
Gain on sale of assets (2,037,104)
Issuance of treasury stock in exchange for consulting
Services 37,205
Changes in operating assets and liabilities:
Accounts receivable (1,920,974) (374,169)
Prepaid expenses and other current assets (91,266) (10,073)
Notes and guaranteed royalties receivable 1,147,393 163,707
Notes receivable from related parties 19,288 37,201
Accounts payable and accrued expenses 1,149,611 327,108
Income tax payable (549,878) 55,611
Unearned revenue and deferred rent (69,759) 45,138
---------------------------------------------
Net cash used in operating activities (1,232,237) (115,031)
Investing activities:
Purchases of short-term investments - (994,385)
Proceeds from sales of short-term investments 981,133 997,036
Proceeds from sale of assets - 2,509,757
Purchased net assets, net of cash acquired - (1,579,214)
Capital expenditures (326,883) (227,622)
Capitalized software development costs (160,012) -
---------------------------------------------
Net cash provided by investing activities 494,238 705,572
Financing activities:
Proceeds from sales of Common Stock - 37,813
Notes payable to related parties (365,578) (21,330)
Short term notes payable 157,706 (19,843)
---------------------------------------------
Net cash provided by financing activity (207,871) (3,360)
Net increase (decrease) in cash and cash equivalents (945,870) 587,181
Cash and cash equivalents at beginning of year 1,347,246 760,065
---------------------------------------------
Cash and cash equivalents at end of year $ 401,376 $ 1,347,246
=============================================
</TABLE>
Non-cash financing activities: In Fiscal 1998, the Company purchased all shares
of Somerset Automation, Inc. for $5,557,918. This transaction was partially
financed by the issuance of 1,958,233 shares of common stock and with seller
notes payable totaling $747,907. In July 1999, $300,000 of notes payable to
related parties was exchanged for Common Stock.
See accompanying notes.
31
<PAGE>
1. ORGANIZATION AND BUSINESS
Celerity Solutions, Inc. (the "Company") (formerly known as Capitol Multimedia,
Inc.), a Delaware corporation organized in 1982, develops and markets software
in the supply chain management (SCM) sector of the business software market. SCM
encompasses the planning and control of material and resources from customer
order entry through warehousing and logistics, to customer delivery. The
Company's product line enables control of inventory and resources not only
between locations in the supply chain but through warehouses as well.
On April 16, 1997, the Company sold selected multimedia assets to Davidson &
Associates, Inc., a division of CUC International, Inc. The assets that were
sold include art, animation and audio production capabilities located in St.
Petersburg, Russia, and Concord, Massachusetts.
On December 8, 1997, the Company acquired all of the outstanding stock of
Somerset Automation, Inc. (SAI). SAI is a technology leader in the warehouse
management software market. Its WMS 4.0 software is client server based, highly
flexible, user configurable, and supports single and multiple facility
enterprises.
The Company believes that existing cash and cash equivalents, short-term
investment balances, its accounts receivable factoring agreement and the
recently renegotiated notes to related parties will satisfy the Company's
working capital and capital expenditure requirements for at least the next
twelve months.
The Company experienced a net loss of $2,890,889 in fiscal 1999. 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 as long term. In addition, the largest two notes were
partially settled by non-exclusive license fees sales to the related parties
totaling $400,000 and the exchange of $300,000 debt for equity (refer to note
16).
Management anticipates declining revenues in fiscal 2000 as a result of the year
2000 change-over slowing purchase decisions for customers and potential
customers of the Company. Management believes that operating expenses have been
reduced sufficiently to achieve profitability and to generate sufficient
operating cash flows in fiscal 2000 to meet all current obligations. In the
event revenues decline further than planned, 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. The Company can attempt to renegotiate agreements with its
major note holders, who are the President and Chairman of the Company. These
note holders have been willing to reschedule payments in the past to improve the
Company's liquidity. The Company can also attempt to provide stock as
compensation to management. Looking forward to 2001, the Company expects sales
to increase as decisions delayed by the year 2000 change over are made. In
addition, 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.
There is no assurance that the Company can achieve the profitability and
positive liquidity discussed above.
32
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash in banks and investments in highly
liquid, short-term instruments with maturities of 90 days or less when
purchased. Cash equivalents consist principally of overnight repurchase
agreements.
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to credit risk
consist primarily of short term investments, accounts receivable, notes
receivable from related parties and notes and guaranteed royalties receivable.
The risk of loss on the accounts receivable, and notes and guaranteed royalties
receivable, is minimized by the creditworthiness of the Company's customers
located in the U.S., and the Company's credit and collection policies. The
Company performs ongoing credit evaluations of its customers, generally does not
require collateral, and maintains allowances for potential credit losses. As of
March 31, 1999, approximately 78% of accounts receivable were concentrated with
four customers.
The risk of loss associated with the notes receivable from related parties is
minimized as the notes receivable are collateralized by the notes payable to
related parties.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of the Company's financial instruments, primarily cash and cash
equivalents, short- term investments, accounts receivable, notes receivable from
related parties, notes and guaranteed royalties receivable, accounts payable,
accrued expenses and short-term notes payable, approximate their carrying value
as of March 31, 1999 and 1998 due to the-short term nature and the variable
interest rate of those instruments that bear interest.
The fair value of the note payable to related parties approximated carrying
value due to no material changes in interest rates since their issuance in
fiscal 1999.
LONG-LIVED ASSETS
In accordance with Statement of Financial Accounting Standards (SFAS) No. 121,
Accounting for the Impairment of Long Lived Assets and for Long-Lived Assets to
Be Disposed Of, the Company records impairment losses on long-lived assets used
in operations when events and circumstances indicate that the assets might be
impaired and the undiscounted cash flows estimated to be generated by those
assets are less than the carrying amounts of those assets. During the fiscal
year ended March 31, 1999, events and circumstances indicated that $785,000 of
capitalized software and related goodwill of $995,017 might be impaired.
However, the Company's estimate of undiscounted cash flows indicated that such
carrying amounts were expected to be recovered. Nonetheless, it is reasonably
possible that the estimate of undiscounted cash flows may change in the near
term resulting in the need to write-down those assets to their fair value.
33
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and depreciated on a straight-line
basis over estimated useful lives. Repair and maintenance expenditures are
charged to operations as incurred. Estimated useful lives are as follows:
Furniture and fixtures 5 - 7 years
Computers and equipment 3- 5 years
Purchased software 3 years
Leasehold improvements Shorter of 3-10 years or the
remaining term of the lease
CAPITALIZED SOFTWARE COSTS
The Company accounts for software development costs in accordance with SFAS No.
86, Accounting for Software Development Costs. Under SFAS No. 86, software
development costs incurred until technological feasibility is established are
expensed as research and development. Software development costs incurred after
technological feasibility is established are capitalized and amortized over the
products' estimated useful life commencing with general release.
Amortization is provided using the straight-line method over the estimated
useful life, which generally is five years or less. All capitalized software is
amortized on a product-by-product basis using the ratio that current gross
revenues bear to the total of current and anticipated future gross revenues with
minimum amortization based on a straight-line basis over the product's useful
life. The establishment of technological feasibility and the ongoing assessment
of recoverability of capitalized software costs requires considerable judgment
by management with respect to numerous external factors, including, but not
limited to, anticipated future gross revenues, competition, estimated economic
lives and changes in software and hardware technologies. Provisions for declines
in the net realizable value of capitalized software costs are made in the period
in which they first become determinable.
GOODWILL
Goodwill represents the excess purchase price paid over the net assets acquired
in the purchases of Client Server Technologies Inc. (CSTI) on March 31, 1997 and
Somerset Automation Inc. (SAI) on December 8, 1997 (See Note 8). Goodwill is
being amortized on a straight-line basis over 10 and 7 year periods for CSTI and
SAI, respectively, based on management's estimate of the useful life.
34
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
REVENUE RECOGNITION
Revenue derived from the sale of hardware products and software licensing
arrangements is recognized in accordance with Accounting Research Bulletin (ARB)
No. 45 Long Term Construction-Type Contracts and SOP 81-1 Accounting For
Performance of Construction-Type and Certain Production-Type Contracts.
The Company derives three types of revenues related to its software products.
Services, on a time and material basis for significant modifications or
consulting contracts, are recorded as they are rendered and related costs
incurred. License fee revenue is recorded based upon the percentage of
completion method of accounting for significant modification and consulting
contracts. Software support contract revenue is recognized ratably over the term
of the contract. Hardware is recognized when delivered.
The Company generally warrants that its products will function substantially in
accordance with documentation provided to customers for approximately six months
following initial installation. As of March 31, 1999, the Company had not
incurred any significant expenses related to warranty claims.
STOCK-BASED COMPENSATION
The Company grants stock options for a fixed number of shares to employees with
an exercise price at least equal to the fair value of the shares at the date of
the grant. The Company has elected to follow Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees ("APB No. 25") and related
interpretations in accounting for its employee stock options. The Company has
adopted the disclosure only provisions provided for under SFAS No. 123,
Accounting for Stock-Based compensation ("SFAS No. 123"). Under APB No. 25,
because the exercise price of the Company's employee stock options equals the
market price of the underlying stock on the date of grant, no compensation
expense is recognized.
Stock options and other stock-based awards to non-employees are accounted for
based on fair value.
INCOME TAXES
The Company provides for income taxes under the liability method prescribed by
SFAS No. 109, Accounting For Income Taxes. Under this method, deferred income
taxes are recognized for the future tax consequences of differences between the
tax and financial accounting bases of assets and liabilities at each year end.
Deferred income taxes are based on enacted tax laws and statutory tax rates
applicable to the periods in which the differences are expected to affect
taxable income (loss). Valuation allowances are established when necessary to
reduce deferred tax assets to the amounts expected to be realized.
NET LOSS PER SHARE
In 1997, the Financial Accounting Standards Board (FASB") issued SFAS No. 128,
Earnings per Share ("SFAS NO. 128"). SFAS No. 128 replaced the calculation of
primary and fully diluted earnings per share with basic and diluted earnings per
share. Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is similar to the previously reported fully diluted earnings
per share.
35
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Significant areas in which estimates are
used include revenue recognition, useful lives of property and equipment,
intangibles and certain accrued expenses. Actual results could differ from those
estimates.
RECLASSIFICATION
Certain amounts in the Fiscal 1998 financial statements have been reclassified
to conform to the fiscal 1999 presentation.
SEGMENT REPORTING
Effective April 1, 1998, the Company adopted SFAS No. 131, Disclosures About
Segments of an Enterprise and Related Information. SFAS 131 superseded FASB
Statement No. 14, Financial Reporting For Segments of a Business Enterprise.
SFAS 131 establishes standards for the way that public business enterprises
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports. SFAS 131 also establishes standards for
related disclosures about products and services, geographic areas, and major
customers. The adoption by the Company of SFAS 131 did not affect results of
operations, financial position, or the footnote disclosures.
GEOGRAPHIC AREA OF OPERATIONS
At March 31, 1999 only 6% of the Company's labor force was employed by the
Company's subsidiary in St. Petersburg, Russia. Economic conditions in Russia,
including lower wage rates and different standards of living, allow the Company
to transact business in St. Petersburg at a relatively low cost structure.
Changes in the political, social, or economic stability, or significant changes
in the exchange rate of the Russian Ruble would not have a significant affect on
the Company's operations. However, if this were to occur, the Company would
shift tasks to its U.S. labor force and close this operation.
FOREIGN CURRENCY TRANSACTIONS
As the functional currency of the Company's Russian subsidiary is the United
States dollar, the Company does not record foreign currency translation
adjustments in shareholders equity. Foreign currency transaction gains and
losses are a result of the effect of exchange rate changes on transactions
denominated in currencies other than the functional currency and are generally
included in determining net loss for the period in which the exchange rate
changes. Such amounts were not material for fiscal years 1999 or 1998.
36
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
RECENT ACCOUNTING PRONOUNCEMENTS
During 1998, SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities ("SFAS No. 133") was issued. SFAS No. 133 requires companies to
record derivatives on the balance sheet as assets or liabilities, measured at
fair value. Gains or losses resulting from changes in the values of those
derivatives would be accounted for depending on the use of the derivative and
whether it qualifies for hedge accounting. SFAS No. 133 is effective beginning
in 2000. The adoption of SFAS No. 133 is not expected to have a material impact
on the financial position or of results of operations of the Company.
3. NOTES RECEIVABLE FROM RELATED PARTIES
As part of the December 8, 1997 acquisition of SAI, the Company entered into
loan agreements with several former SAI shareholders. These 7.5% interest
bearing notes are secured by the notes payable to these shareholders resulting
from the same acquisition as more fully described in Note 9. The balance
receivable as of March 31, 1999 was $98,711 including interest.
4. NOTES AND GUARANTEED ROYALTIES RECEIVABLE
In connection with its June 1993 sale of video post-production assets, the
Company received a secured promissory note for $800,000, interest accruing at
8.0% and compounding annually, principal plus accrued interest due on July 31,
1998 with an option to convert the note into stock.
Effective July 31, 1998, the Company entered into an agreement with Henninger
Media Services, Inc. ("HMSI") amending its secured promissory note dated June
30, 1993. The Company also entered into an agreement with Henninger Acquisition,
L.L.C. ("HALLC") and HMSI whereby the Company assigned all rights under its
secured agreement with HMSI, other than rights to payments and benefits stated
below, to HALLC.
Upon execution of the agreements, HMSI and HALLC paid the Company $845,359 and
agreed to give the Company $60,000 of post-production goods and services. HMSI
also agreed to pay the Company four additional separate monthly payments of
Forty Thousand Dollars ($40,000) followed by 12 separate payments of Twelve
Thousand Five Hundred Dollars ($12,500). The total payments to be received under
these agreements including interest are $1,215,359. The Company negotiated an
acceleration of the payments due and has received all but $12,500 at March 31,
1999.
37
<PAGE>
5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
March 31
-------------------------------
1999 1998
-------------------------------
Property and equipment:
Computers and office equipment $ 980,430 $ 793,696
Furniture and fixtures 245,050 223,501
Purchased software 326,814 214,130
Leasehold improvements 40,839 34,923
-------------------------------
Total property and equipment 1,593,133 1,266,250
Accumulated depreciation (970,149) (697,577)
===============================
Net property and equipment $ 622,984 $ 568,673
===============================
6. CAPITALIZED SOFTWARE COSTS
Capitalized software costs include purchased developed software resulting from
the acquisitions of Client Server Technologies, Inc. on March 31, 1997 and
Somerset Automation, Inc. on December 8, 1997. Capitalized software is being
amortized on a straight line basis over 5 years for CSTI and SAI, which is
management's estimate of the useful life. And $160,012 of capitalizable costs,
which were incurred during the year ended March 31, 1999.
7. LOSS PER SHARE
Loss per share has been calculated as follows:
<TABLE>
<CAPTION>
March 31
----------------------------------
1999 1998
----------------------------------
<S> <C> <C>
Numerator
Net loss $ (2,890,889) $ (1,995,015)
----------------------------------
Denominator
Weighted average shares outstanding 8,033,825 6,656,882
Effect of dilutive securities - -
----------------------------------
Adjusted weighted average shares outstanding 8,033,825 6,656,882
==================================
Basic and diluted loss per common share $ ( .36) $ ( .30 )
==================================
</TABLE>
Potential common shares are not included because they would be antidilutive.
38
<PAGE>
8. 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 that were sold include machinery and capital equipment utilized in art,
animation and audio production in St. Petersburg, Russia, and Concord, Mass. The
net asset value of assets transferred was $472,655. As part of the transaction,
the Company amended its software development contract with Blizzard
Entertainment (the Company was paid all related receivables from the contract),
entered into a work-for-hire agreement with Davidson related to software
engineering services, and assigned and transferred its present Concord,
Massachusetts office lease to Davidson. The gain on sale resulting from this
transaction was $2,037,104.
On December 8, 1997, the Company acquired all of the outstanding stock of SAI
for stock, debt securities and cash valued at $5,557,918. The purchase price was
composed of 1,958,233 unregistered shares of the Company's common stock valued
at $2,313,848, long-term notes, with a stated interest rate of 7.5%, totaling
$747,907, and cash payments totaling $2,496,163. The cash portion of the
purchase price was netted on the Consolidated Statement of Cash Flows against
$916,949 of cash held by SAI. SAI was merged into Somerset Solutions, Inc.
(Somerset), a wholly owned subsidiary of the Company, at which time SAI's
corporate existence terminated. The transaction was accounted for under the
purchase method of business combinations. As a result of the acquisition,
$394,553 of goodwill was recorded which will be amortized on a straight line
basis over 7 years, $665,323 of capitalized software was recorded and will be
amortized on a straight line basis over 5 years, and $3,094,527 of purchased
in-process research and development was written off at December 8, 1997.
39
<PAGE>
9. LONG-TERM DEBT TO RELATED PARTIES AND LEASE COMMITMENTS:
Long-term debt to related parties consist of the following:
<TABLE>
<CAPTION>
Year Ended March 31
-----------------------------------------
1999 1998
-----------------------------------------
<S> <C> <C>
1. Convertible unsecured non-interest bearing notes
payable to various employees and former employee
stockholders issued in connection with the acquisition
of CSTI. The payment schedule was renegotiated in
April of 1999. The term is 24 months with interest $ 259,434 $ 317,852
accrued at 8% compounded monthly.
2. Convertible secured non-interest bearing note payable
to Officer issued in connection with the acquisition
of CSTI. The payment schedule was renegotiated in
July of 1999. The term is 42 months with interest
accrued at 8% compounded monthly. 778,899 1,228,257
3. Secured note payable to an Officer issued in
conjunction with the acquisition of SAI . The
payment schedule was renegotiated in July of
1999. The term is 36 months with interest accrued
at 8% compounded monthly. 439,959
4. Notes payable to various employees and former
employees in conjunction with the acquisition of SAI.
The payment schedule was renegotiated in April of 97,666 732,738
1999. The term is 24 months with interest accrued at
8% compounded monthly.
5. Notes payable to various employees and former
employees at a 7.5% interest rate in conjunction with
the acquisition of SAI. 37,312
-----------------------------------------
Total debt to related parties 1,613,270 2,278,847
Less current portion 593,318 1,100,797
-----------------------------------------
Total long-term debt to related parties $1,019,952 $ 1,178,050
=========================================
</TABLE>
Subsequent to year-end, the Company renegotiated the payment terms on notes 1 -
4. Please see the subsequent event footnote for more detailed information.
Note 5 represents final payment to SAI note holders whose original notes were
not renegotiated.
40
<PAGE>
9. LONG-TERM DEBT AND LEASE COMMITMENTS, CONTINUED
At March 31, 1999 the long term debt to related parties is scheduled to be paid
as follows:
Principal
Fiscal year ending March 31:
2000 $ 593,318
2001 314,147
2002 243,432
2003 462,373
Thereafter
--
============
Total $ 1,613,270
============
ACCOUNTS RECEIVABLE FACTORING AGREEMENT
The Company entered into an agreement on February 18, 1999 with a bank, to sell
(factor) account receivable invoices not to exceed $800,000. The term of this
agreement is for one year, and from year to year thereafter unless terminated in
writing by either party. The agreement provides for advances on invoices of 80%,
with a monthly factor rate of 1.75% and no administrative fee. As of March 31,
1999 , the Company had a short term payable to the bank under this agreement of
$185,899. This arrangement expires in February 2000.
LEASE COMMITMENTS
The Company leases office space, computer hardware and office equipment under
non-cancelable operating lease expiring on various dates through 2004 and
includes various renewal options and escalation clauses. Total rent expense for
operating leases amounted to $717,182 and $556,429 for the years ended March 31,
1999 and 1998, respectively. At March 31, 1999, minimum annual commitments under
noncancelable operating leases and sublease rental income are as follows:
<TABLE>
<CAPTION>
Operating Sublease Rental
leases Income Net
<S> <C> <C> <C>
Fiscal year ending March 31:
2000 $ 892,478 $ (402,383) $ 490,095
2001 672,042 (233,144) 438,898
2002 681,686 (233,144) 448,542
2003 690,108 (233,144) 456,964
2004 615,815 (233,144) 382,671
Thereafter -- -- --
=========== =========== ===========
Total $ 3,552,129 $(1,334,959) $ 2,217,170
=========== =========== ===========
</TABLE>
The Company sub-leases its former office in Bethesda, Maryland under two
non-cancelable operating leases. One lease runs through April 2000 and one
through the end of the Company's lease in Fiscal 2004 and require that minimum
lease payments be made to the Company of $169,239 and $1,165,722 respectively.
41
<PAGE>
10. CAPITAL STOCK
WARRANTS
At March 31, 1999, the Company had outstanding warrants to purchase 517,700
shares of its common stock, as follows:
In April 1992, the Company issued Series A Warrants to purchase 492,700 shares
(344,500 warrants, each of which entitles the holder to purchase 1.74 shares of
Common Stock) at an exercise price of $3.57 per share through March 31, 1998.
The number of shares and exercise price are based on anti-dilutive provisions in
the Warrants. These Warrants have been extended through March 31, 2000.
In May 1997, in connection with an agreement for investment banking services,
the Company issued a warrant to purchase 25,000 shares of the Company's common
stock at $1.24 per share for a period of three years.
STOCK OPTIONS
At March 31, 1999, the Company had outstanding options to purchase 2,036,900
shares of its Common Stock as follows:
Grants Pursuant to Employment Arrangements
During 1995, the Company granted options to purchase 330,000 shares of common
stock, with a $3.898 weighted average exercise price per share, pursuant to
various employment arrangements. At September 13, 1996 options to purchase
230,000 shares were canceled, and in August 1997 options to purchase 72,000
shares were cancelled. At March 31, 1998 and 1999, options to purchase 28,000
shares of common stock at $3.75 per share were outstanding with expiration dates
of March 31, 2006. 28,000 shares were exercisable at the $3.75 exercise price
per share at March 31, 1999.
Non-Qualified Employee Stock Option Plan
In 1993, the Company adopted the Amended and Restated 1991 Non-Qualified
Celerity Solutions Inc. Employee Stock Option Plan (the Employee Plan). In
August 1997, the Company amended this Employee Plan to reflect the Company name
change and to permit the Company to grant options for 3,000,000 shares of common
stock to its employees and consultants. Options are granted at the fair market
value of the Company's common stock on the date of grant.
42
<PAGE>
10. CAPITAL STOCK, CONTINUED
The following table sets forth employee stock options granted, exercised,
canceled, and outstanding under the Employee Plan:
Outstanding Options
Number of Options Weighted Average
ExercisePrice
------------------------------------------
Balance at March 31, 1997 1,194,661 $2.5370
Granted 447,000 1.3557
Exercised (27,500) 1.0800
Expired (27,450) 6.1597
Canceled (130,185) 5.7624
Balance at March 31, 1998 1,456,526 1.8456
Granted 817,000 2.1918
Expired (7,026) 4.4589
Canceled (647,600) 1.8787
Balance at March 31, 1999 1,618,900 $2.0110
At March 31, 1999, 930,372 options outstanding under the Employee Plan were
exercisable. There were 1,224,314 and 1,386,688 options available for grant
under the Employee Plan at March 31, 1999 and 1998, respectively.
Non-Qualified Stock Option Plan for Non-Employee Directors
In 1995, the Company adopted the Amended and Restated 1992 Non-Qualified Stock
Option Plan for Non-Employee Directors (the Director Plan). In August 1997 the
Company amended the Director Plan to permit the Company to grant options to
purchase 600,000 shares of common stock to its non-employee directors. Grants of
options to purchase 15,000 shares of common stock at fair market value are
automatic upon a director's election to the Board and on the date of each
subsequent annual meeting during a director's tenure. On August 25, 1998 the
Director Plan was amended increasing the compensation for Director's services to
a stock option to purchase 20,000 shares of the Company's common stock. Each
option granted under the Director Plan is exercisable for five years from the
date of grant.
The following table sets forth non-employee director stock options granted,
exercised, canceled, and outstanding under the Director Plan:
Outstanding Options
Number of Options Weighted Average Exercise
Price
-----------------------------------------------
Balance at March 31, 1997 220,000 $ 3.644
Granted 90,000 1.550
-----------------------------------------------
Balance at March 31, 1998 310,000 3.036
Granted 80,000 1.500
-----------------------------------------------
Balance at March 31, 1999 390,000 $ 2.7211
===============================================
43
<PAGE>
10. CAPITAL STOCK, CONTINUED
At March 31, 1999, 390,000 options outstanding under the Director Plan were
exercisable. There were 210,000 and 290,000 option shares available for grant
under the Director Plan at March 31, 1999 and 1998, respectively.
SFAS No. 123 (FAS No. 123), "Accounting for Stock-Based Compensation" requires
disclosure of pro forma information regarding net income and net income per
share based on fair value accounting for stock-based compensation plans. The
following table presents weighted average price and life information about
significant option groups outstanding at March 31, 1999:
<TABLE>
<CAPTION>
Shares outstanding Options Exercisable
------------------ -------------------
Weighted Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Life Exercise Number Exercise
Exercise Prices Outstanding (years) Price Exercisable Price
<S> <C> <C> <C> <C> <C>
$ .83 to $ 1.50 947,900 3.40 $ 1.1555 458,072 $ 1.1067
$ 1.51 to $ 2.63 526,000 3.06 $ 2.1391 327,300 $ 2.1212
$ 3.75 to $ 4.66 563,000 2.99 $ 4.1964 563,000 $ 4.1964
- ---------------------------------------------------------------------------------------------------------------
$ .83 to $ 4.66 2,036,900 3.20 $ 2.2498 1,348,372 $ 2.6430
===============================================================================================================
</TABLE>
Pursuant to the requirements of FAS 123, the following are the pro forma net
income and net income per share for March 31, 1999 and 1998, as if the
compensation expense for the option plans had been determined based on the fair
value at the grant date for grants in the years then ended:
<TABLE>
<CAPTION>
March 31, 1999 March 31, 1998
-------------- --------------
As Reported Pro Forma As Reported Pro Forma
<S> <C> <C> <C> <C>
Net loss $ (2,890,889) $ (3,905,547) $ (1,995,015) $ (2,406,070)
==================================================================================
Net loss per share $ (.36) $ (.49) $ (.30) $ (.36)
==================================================================================
</TABLE>
The fair value of options at the date of grant were estimated using the
Black-Scholes model with the following weighted average assumptions:
Options
1999 1998
---- ----
Volatility 1.000 1.000
Expected option life (years) 4.9 yrs. 4 yrs.
Interest rate ( risk free) 5.12% 6.00%
Volatility was calculated on a monthly basis. The company has never declared nor
paid dividends on any of its capital stock and does not expect to do so in the
foreseeable future. The effects on 1999 and 1998 pro forma net income and net
income per share of expensing the estimated fair value of stock options and
shares are not necessarily representative of the effects on reporting the
results of operations for future years as the periods presented include only one
and two years of option grants under the Company's plans.
44
<PAGE>
11. INCOME TAXES
Significant components of deferred tax assets as of March 31 are as follows:
1999 1998
---------------------------
Deferred tax assets:
Net operating loss carryforwards $ 4,150,000 $ 2,927,000
Depreciable and amortizable assets 8,000 8,000
Allowance for doubtful accounts 56,000 56,000
Alternative minimum tax credit carryfoward 74,000 43,000
Research tax credit carryforwards 320,000 281,000
Accrued Expenses 97,000 57,000
---------------------------
Total Deferred Assets 4,705,000 3,372,000
Deferred tax liabilities:
Cash to accrual difference from acquired
companies (153,000) (188,000)
Prepaid Expenses (24,000) (24,000)
---------------------------
Total Deferred Liabilities (177,000) (212,000)
---------------------------
Net deferred assets 4,528,000 3,160,000
Valuation allowance for net deferred tax assets (4,528,000) (3,160,000)
===========================
Net deferred assets: $ -- $ --
===========================
At March 31, 1999 and 1998, the Company had Federal tax net operating loss
carryforwards of $11,132,000 and $8,109,000, respectively. The valuation
allowance for deferred tax assets increased by $ 1,368,000 from 1998 to 1999.
Tax net operating loss and investment tax credit carryforwards expire in varying
amounts beginning in 1999 through 2019. Tax net operating loss and tax credit
carryforwards are subject to limitation resulting from certain corporate
ownership changes under Internal Revenue Code Sections 382 and 383.
12. SIGNIFICANT CUSTOMERS
During 1999, the Company had sales of approximately $3,394,000, $1,404,000,
$1,307,000 and $ 1,117,000 to four customers which represented 30%, 12%, 11% and
10% of net sales respectively. During 1998, the Company had sales of
approximately $865,000 and $717,000 to two customers which represented 14% and
12% of net sales respectively.
13. RESTRUCTURING EXPENSES
During the year ended March 31, 1999, the Company recognized $439,277 of charges
consisting primarily of severance benefits for three employees none of which has
been paid.
45
<PAGE>
14. EMPLOYEE RETIREMENT PLAN
On July 1, 1989, the Company adopted a 401K retirement plan (the Retirement
Plan) that covers substantially all of the Company's employees. Each eligible
employee may contribute up to 15% of their compensation, subject to certain
limitations, to the retirement plan. The Company makes a matching contribution
of 50% on the first 6% of the participant's elective deferral.
The Company acquired CSTI on March 31, 1997 and SAI on December 8, 1997. Each
Company maintained a 401K retirement plan. The CSTI Plan was merged into the
Company's plan as of April 1, 1998. The SAI plan was merged into the Company's
plan as of August 1, 1998.
Company contributions totaled $101,773 and $35,355 during the years ended March
31, 1999 and 1998, respectively.
15. LICENSING, DISTRIBUTION, AND DEVELOPMENT AGREEMENTS
Licensing and Distribution Agreement with Davidson & Associates, Inc. The
Company entered into an agreement with Davidson & Associates, Inc. ("Davidson")
on July 11, 1995 pursuant to which Davidson was granted a worldwide license to
distribute six software programs and related materials produced by the Company
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 works. 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 agreed to 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 year ended March 31, 1999 or
1998. In March 1998, the Company transferred and assigned to Davidson any and
all rights in full for three out of the six titles under this agreement.
Publishing and Licensing Agreement with Broderbund Software, Inc. The Company
entered into an agreement dated February 9, 1996 with Broderbund granting a
worldwide license 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
will receive 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 agreed to pay the Company a non-refundable advance, against future
payments in the amount of $100,000 for each title accepted by Broderbund.
Broderbund also agreed to 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 during the year ended March 31, 1999 or 1998.
46
<PAGE>
15. LICENSING, DISTRIBUTION, AND DEVELOPMENT AGREEMENTS, CONTINUED
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 for the Windows 95 and Macintosh operating
systems. As part of the agreement the Company agreed to grant Blizzard all
rights, titles, and interest in work conceived, developed, created, obtained, or
first reduced to practice for Blizzard under this agreement. Subject to certain
termination provisions, Blizzard agreed to pay the Company a development fee of
$1,250,000 to be paid out at the accomplishment of specified milestones.
Blizzard also agreed 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. There were no costs or
revenues generated under this agreement during the year ended March 31, 1999 or
1998.
16. SUBSEQUENT EVENT AND RELATED PARTY TRANSACTIONS
During March and July 1999, all notes payable to related parties over $20,000
were renegotiated as follows:
The note payable with a balance of $1,025,798 at March 31, 1999 including
imputed interest to be paid will be reduced by $200,000 in fiscal 2000 for the
sale of a source code license to Mr. Carr related to the CSTI software. The Mr.
Carr is prohibited from transferring this license to a third party by a
non-compete agreement which extends 12 months from termination of employment.
The note payable is further reduced by the conversion of $300,000 of the debt
into equity at $.40 per share. The remaining $538,048 is to be paid over 42
months at 8% with monthly payments of approximately $14,681.
Another note payable with a balance of $439,960 including accrued interest will
be reduced by $200,000 in fiscal 2000 for the sale of a source code license to
the Mr. Ringuette for the warehouse management software acquired in the Somerset
acquisition. The balance of $239,960 is to be paid over 36 months at 8% with
monthly payments of $7,494. These payments are offset by royalty fees earned
from a 5 year royalty agreement. If there is a balance remaining at the end of
the 5 year agreement the Company must pay that balance.
One note holder with a balance of $20,035 has not agreed to new payment terms.
His note is currently past due and is accruing interest at a 13.75% annual rate.
The remaining notes payable to related parties totaling $337,065 including
accrued interest at March 31, 1999 were renegotiated into equal monthly payments
over two years at 8% interest.
The above renegotiations resulted in the reclassification of $1,293,281 of
current liabilities to long term, with $700,000 being transferred in the form of
debt conversions into equity and revenue. All payment schedules also include
provisions to defer payments up to 6 months. This deferral of 6 months of
principal payments results in $ 205,000 of current Liabilities deferred on a
roll forward basis. This includes the note payments as well as the severance pay
outs of $80,000 scheduled over the next year, which is in accrued liabilities
and can also be deferred.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Not applicable.
47
<PAGE>
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS
The information required by this item is incorporated by reference to the
information contained in the "Election of Directors" and "Executive Officers"
sections of the Company's Proxy Statement for its 1999 Annual Meeting of
Shareholders.
ITEM 10. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the
information contained in the "Executive Compensation" section of the Company's
Proxy Statement for its 1999 Annual Meeting of Shareholders.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to the
information contained in the "Security Ownership of Certain Beneficial Owners"
and "Security Ownership of Management" sections of the Company's Proxy Statement
for its 1999 Annual Meeting of Shareholders.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the
information contained in the "Transactions with Beneficial Owners, Directors,
and Executive Officers" section of the Company's Proxy Statement for its 1999
Annual Meeting of Shareholders.
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
FINANCIAL STATEMENTS
The following financial statements are included in this report for the fiscal
years ending March 31, 1999 and 1998.
o Balance Sheets
o Statements of Operations
o Statements of Stockholder's Equity
o Statements of Cash Flows
o Notes to Financial Statements
48
<PAGE>
FINANCIAL STATEMENTS, CONTINUED
Schedule II - Valuation and Qualifying Accounts
Celerity Solutions Inc.
<TABLE>
<CAPTION>
----------------------------------------------------------------
Additions
Balance at Charged to Charged to Balance at
Beginning Costs and Other End of
Description of Period Expenses Accounts Deductions Period
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year End March 31, 1999
Allowance for doubtful accounts $156,600 $1,347,401 $ - $1,276,001 $230,000
Year End March 31, 1998
Allowance for doubtful accounts $126,394 $ 53,171 $ - $ 20,965 $158,600
- -------------------------------------------------------------------------------------------------------
</TABLE>
Bad debts written off net of collections.
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable, and therefore
have been omitted.
EXHIBITS:
A list of the exhibits included as part of this report is set forth in the
Exhibit index which immediately precedes such exhibits and which is incorporated
herein by reference.
REPORTS ON FORM 8-K
On March 18, 1999, the Company filed a form 8-K and announced that it had
completed several organizational changes, including the resignation of four
directors, and a company-wide restructuring.
49
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
organized.
CELERITY SOLUTIONS, INC.
BY: ___________________
Paul Carr, President and Chief Executive and Chief Financial Officer, July
13, 1999
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
thereby constitutes and appoints Paul Carr, his or her true and lawful
attorney-in-fact and agent with full power of substitution and resubstitution,
for him or her and in his or her name, place and stead, in any and all
capacities to sign any and all amendments or supplements to this Form 10-KSB,
and to file the same, with all exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorney-in-fact and agent full power and authority to do and perform each
and every act and thing necessary or appropriate to be done in and about the
foregoing, as fully to all intents and purposes as he or she might or could do
in person, lawfully do, or cause to be done by virtue hereof.
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
NAME TITLE AND DATE
- ------------------------------- -----------------------------------
/s/ Paul Carr President, CEO, CFO & Director
- -------------------------------
Paul Carr July 13, 1999
/s/ Luc Ringuette Director, Chairman of the Board
- -------------------------------
Luc Ringuette July 13, 1999
/s/ Richard Santagati Director
- -------------------------------
Richard Santagati July 13, 1999
50
<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).
51
<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).
52
<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.
53
<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).
* To be filed by amendment
54
Exhibit 10.57
July 13, 1999
Paul Carr
2 Monadnock Road
Wellesley, MA 02181
Dear Mr. Carr:
Reference is made to a certain Convertible Promissory Note attached as
Exhibit A, in the original principal amount of $1,613,177 dated 3/31/97 (the
"Note") issued to you by Client Server Technologies, Inc. and Capital
Multimedia, Inc. (currently Celerity Solutions, Inc.) and amended on September
14, 1998 attached as Exhibit B and December 30,1998 attached as Exhibit C. The
undersigned acknowledges that the current principal balance due on the Note is
an aggregate of $538,048.53 calculated as follows:
(1) original balance of Note $ 1,613,177.00
(2) less audit adjustments(1) provided for in the -37,377.86
Asset Purchase Agreement consisting of the --------------
following adjustments made on the dates indicated:
a. 4/1/97 $33,723.42
b. 3/1/98 $ 3,654.44
(3) less installment payments to date aggregating $ -250,000.00
consisting of the following payments made --------------
on the dates indicated:
a. 3/31/98 $ 83,333
b. 6/31/98 $ 83,333
c. 9/31/98 $ 83,333
(4) less a payment of $200,000 made on 10/15/98 pursuant $ -200,000.00
to an agreement dated 9/14/98 shown as Exhibit B --------------
(5) less a payment of $100,000 made on 1/15/99 pursuant $ -100,000.00
--------------
- ----------
(1) An adjustment was provided for in the purchase of CSTI by Capital
Multimedia. This is defined in paragraph 6.7 of the Agreement for the
Acquisition of the Outstanding Stock of Client Server Technologies Inc. The
adjustment of 4/1/97 was calculated to be .041908 per share. The adjustment on
3/1/98 was increased by .004541 per share. Paul Carr had 804,701 shares of CSTI
stock at the date of the acquisition.
<PAGE>
to an agreement dated 12/30/98 shown as Exhibit C
(6) plus interest on past due payments as set forth on Exhibit D $ +12,249.39
--------------
(7) less purchase of Celerity Stock described in Exhibit E $ -300,000.00
--------------
(8) less purchase of Source License to Supply $ -200,000.00
Chain Planner attached as Exhibit F --------------
Principal balance of Note due as of the date hereof $ 538,048.53
--------------
The undersigned further acknowledges that, except as indicated above, no
other amounts, including without limitation, interest, fees or expenses are due
and payable to the undersigned with respect to the Note.
The undersigned hereby consents to the amendment of the Note to provide for
the payment of the remaining principal balance in forty-two (42) equal
installments of principal, together with accrued interest (with interest accrual
commencing July 1, 1999) at an annual rate of eight percent (8%) per annum
compounded monthly, commencing July 15, 1999, provided, however, that up to six
(6) monthly installments of principal may be deferred at the election of
Celerity Solutions, Inc. during the remaining term of the Note so long as
monthly installments of interest continue to be made thereon and, provided
further, that the outstanding principal balance of the Note, together with all
accrued interest, shall be paid in full not later than April 15, 2003. The
monthly payment will be $14,681.37 as calculated on the amortization schedule
attached as Exhibit G. In all other respects the Note shall remain unchanged and
in full force and effect. Please indicate your consent to the foregoing by
executing the copy of this letter in the space provided whereupon this letter
shall become a binding agreement between you and Celerity Solutions, Inc.
Very truly yours,
CELERITY SOLUTIONS, INC.
By /s/ Paul Carr
------------------------------
Its President
------------------------------
Agreed and accepted this 13th day of July, 1999
/s/ Paul Carr
----------------------------------
Paul Carr
<PAGE>
EXHIBIT A
CONVERTIBLE PROMISSORY NOTE
This note was included in an 8K filing by the Company dated March 31, 1997
describing the acquisition of the outstanding stock of Client Server
Technologies Inc. by Capital Multi-media. This filing is incorporated by
reference herein.
<PAGE>
EXHIBIT B
NOTE AMENDMENT DATED SEPTEMBER 14, 1998
This exhibit was not considered material information and therefore has not been
included in the filing July 13, 1999 10K filing
<PAGE>
EXHIBIT C
NOTE AMENDMENT DATED DECEMBER 30, 1998
This exhibit was not considered material information and therefore has not been
included in the filing July 13, 1999 10K filing
<PAGE>
EXHIBIT D
INTEREST ON PAST DUE PAYMENTS
6/27/99 Prime Rate 7.75% Interest Rate 13.75%
Days Rate Per Interest
Amount Due Date Past Due Day Due
70,000 2/15/99 132 0.000377 3,480.82
70,000 3/15/99 104 0.000377 2,742.47
219,131 4/15/99 73 0.000377 6,026.10
12,249.39
Note: The Rate per Day is equal to the interest rate for past due payments
provided for in the original promissory note (prime plus 6%), divided
by 365 days. The Interest due is the product of the Amount Due times
the Days Past Due times the Rate Per Day.
<PAGE>
EXHIBIT E
AGREEMENT TO PURCHASE CELERITY STOCK
Celerity Solutions , Inc. (the "Company") shall sell and Paul Carr shall
purchase $300,000 worth of the Company's Common Stock for $.40 per share for a
total of 750,000 shares (the "Shares") of the Company's Common Stock. The
obligation of the Company to sell the Shares is conditioned upon the receipt by
the Company of a fairness opinion from an independent investment banking firm
that the price of $.40 per share for the Company's Common Stock is fair from a
financial point of view. In the event that such investment banking firm
determines that the price of $.40 per share for the Company's Common stock is
not fair from a financial point of view, such price shall be adjusted to a price
deemed fair by such investment banking firm and the number of shares purchased
by Mr. Carr hereunder shall be appropriately adjusted. Further, in the event
that the Company, on or prior to December 31, 1999 sells all or substantially
all of its assets or enters into a merger, consolidation or similar transaction
pursuant to which the Company is not the surviving entity at an effective price
per share for the Company's Common Stock of greater than $.40 per share, then in
any such event, the purchase price per Share paid by Mr. Carr hereunder shall be
increased to the effective price per share realized by the Company or its
stockholders in connection with any such transaction and the number of Shares
purchased by Mr. Carr shall be appropriately reduced. Mr. Carr's Common Stock
certificates issued in connection with the above described purchase shall be
appropriately legended to reflect the above described adjustment mechanism.
Agreed and accepted this 13th day of July, 1999
CELERITY SOLUTIONS, INC.
By: /s/ Paul Carr
-------------------------
Paul Carr
<PAGE>
EXHIBIT F
SUPPLY CHAIN PLANNER
SOURCE LICENSE AGREEMENT
This Agreement is exhibit 10.60 of the Company's July 13, 1999 10K Filing.
<PAGE>
EXHIBIT G
AMORTIZATION SCHEDULE
Interest Rate 8% Payment 14,681.37
Due Date Principal Interest Payment Balance
15-Jul-99 538,048.53 1,793.50 14,681.37 525,160.66
15-Aug-99 525,160.66 3,501.07 14,681.37 513,980.36
15-Sep-99 513,980.36 3,426.54 14,681.37 502,725.52
15-Oct-99 502,725.52 3,351.50 14,681.37 491,395.66
15-Nov-99 491,395.66 3,275.97 14,681.37 479,990.26
15-Dec-99 479,990.26 3,199.94 14,681.37 468,508.82
15-Jan-00 468,508.82 3,123.39 14,681.37 456,950.84
15-Feb-00 456,950.84 3,046.34 14,681.37 445,315.81
15-Mar-00 445,315.81 2,968.77 14,681.37 433,603.21
15-Apr-00 433,603.21 2,890.69 14,681.37 421,812.53
15-May-00 421,812.53 2,812.08 14,681.37 409,943.25
15-Jun-00 409,943.25 2,732.95 14,681.37 397,994.83
15-Jul-00 397,994.83 2,653.30 14,681.37 385,966.76
15-Aug-00 385,966.76 2,573.11 14,681.37 373,858.50
15-Sep-00 373,858.50 2,492.39 14,681.37 361,669.52
15-Oct-00 361,669.52 2,411.13 14,681.37 349,399.28
15-Nov-00 349,399.28 2,329.33 14,681.37 337,047.24
15-Dec-00 337,047.24 2,246.98 14,681.37 324,612.85
15-Jan-01 324,612.85 2,164.09 14,681.37 312,095.57
15-Feb-01 312,095.57 2,080.64 14,681.37 299,494.83
15-Mar-01 299,494.83 1,996.63 14,681.37 286,810.10
15-Apr-01 286,810.10 1,912.07 14,681.37 274,040.79
15-May-01 274,040.79 1,826.94 14,681.37 261,186.36
15-Jun-01 261,186.36 1,741.24 14,681.37 248,246.24
15-Jul-01 248,246.24 1,654.97 14,681.37 235,219.84
15-Aug-01 235,219.84 1,568.13 14,681.37 222,106.60
15-Sep-01 222,106.60 1,480.71 14,681.37 208,905.94
15-Oct-01 208,905.94 1,392.71 14,681.37 195,617.28
15-Nov-01 195,617.28 1,304.12 14,681.37 182,240.02
15-Dec-01 182,240.02 1,214.93 14,681.37 168,773.59
15-Jan-02 168,773.59 1,125.16 14,681.37 155,217.38
15-Feb-02 155,217.38 1,034.78 14,681.37 141,570.79
15-Mar-02 141,570.79 943.81 14,681.37 127,833.22
15-Apr-02 127,833.22 852.22 14,681.37 114,004.07
15-May-02 114,004.07 760.03 14,681.37 100,082.73
15-Jun-02 100,082.73 667.22 14,681.37 86,068.58
15-Jul-02 86,068.58 573.79 14,681.37 71,961.00
15-Aug-02 71,961.00 479.74 14,681.37 57,759.37
15-Sep-02 57,759.37 385.06 14,681.37 43,463.06
15-Oct-02 43,463.06 289.75 14,681.37 29,071.45
15-Nov-02 29,071.45 193.81 14,681.37 14,583.89
15-Dec-02 14,583.89 97.23 14,681.37 (0.26)
Exhibit 10.58
CELERITY SOLUTIONS, INC.
July 13, 1999
Luc Ringuette
22581 Summerfield
Mission Viejo, CA 92692
Dear Mr. Ringuette:
Reference is made to a certain Non-Negotiable Promissory Note and Security
Agreement in the original principal amount of $448,116 dated 12/8/97 (the
"Note") issued to you by Celerity Solutions, Inc, a copy of which is attached
hereto as Exhibit A. The undersigned acknowledges that the current balance due
on the Note is an aggregate of $443,366.76 principal plus interest calculated as
follows:
(1) original balance of Note $ 448,116.00
(2) interest on original Note at 7.5% $ 60,992.00
(3) less installment payments to date consisting of $ -73,027.03
the following payments made on the dates indicated:
a. 12/97 $10,861.92
b. 2/98 $ 9,049.94
c. 3/98 $ 6,369.35
d. 4/98 $10,859.92
e. 8/98 $15,384.89
f. 12/98 $20,501.01
(4) plus interest on past due payment as calculated on Exhibit B $ 4,583.79
(5) less interest on payments not yet due as calculated on $ -705.05
Exhibit C
(6) less purchase of source license for certain Celerity products $200,000.00
as described in the Source License Agreement, dated 7/13/99. -----------
Current balance of Note due as of the date hereof $239,959.71
-----------
The undersigned further acknowledges that, except as indicated above, no
other amounts, including without limitation, interest, fees or expenses are due
and payable to the undersigned with respect to the Note.
<PAGE>
The undersigned hereby consents to the amendment of the Note to provide for
the payment of the remaining principal balance in thirty-six (36) equal
installments of principal, together with accrued interest (with interest accrual
commencing July 1, 1999) at an annual rate of eight percent (8%) per annum
compounded monthly, commencing July 15, 1999, provided, however, that at
discretion of Celerity Solutions, Inc. up to six (6) monthly installments of
principal may be deferred during the remaining term of the Note so long as
monthly installments of interest continue to be made thereon and, provided
further, that the outstanding principal balance of the Note, together with all
accrued interest, shall be paid in full not later than June 15, 2002. The
monthly payment will be $7,494.57 as calculated on the amortization schedule
attached as Exhibit D.
In all other respects the Note shall remain unchanged and in full force and
effect. Please indicate your consent to the foregoing by executing the copy of
this letter in the space provided whereupon this letter shall become a binding
agreement between you and Celerity Solutions, Inc.
Very truly yours,
CELERITY SOLUTIONS, INC.
By /s/ Paul Carr
----------------------
Agreed and accepted this 13th day of July, 1999
/s/ Luc Ringuette
----------------------
Luc Ringuette
<PAGE>
EXHIBIT A
NON NEGOTIABLE PROMISSORY NOTE AND SECURITY AGREEMENT
This note was included in an 8K filing by the Company dated December 8, 1997
describing the acquisition of the outstanding stock of Somerset Automation Inc.
by Celerity Solutions Inc. This filing is incorporated by reference herein.
<PAGE>
EXHIBIT B
INTEREST ON PAST DUE PAYMENTS
Prime Rate 7.75% Interest Rate 12.75%
Amount Due Due Date Days Past Due Day Interest Due
150,830 4/1/99 87 0.000349 4,583.79
4,583.79
Note: The Rate per Day is equal to the interest rate for past due payments
provided for in the original promissory note (prime plus 5%), divided
by 365 days. The Interest due is the product of the Amount Due times
the Days Past Due times the Rate Per Day.
<PAGE>
EXHIBIT C
INTEREST CREDIT FOR PAYMENTS NOT YET DUE
<TABLE>
<CAPTION>
6/28/99 Interest Rate 7.50%
Amount Paid Early Less Fee for Net Amount Due Date Days Early Day Rate Interest
Source License Paid Early Credit
<S> <C> <C> <C> <C> <C> <C>
150,830.00 150,830.00 - 10/1/99 96.00 0.000205 0.00
56,618.00 49,170.00 7,448.00 10/1/00 462.00 0.000205 705.05
200,000.00 705.05
</TABLE>
Note: The Rate per Day is equal to 7.5%, divided by 365 days. The Interest due
is the product of the Net Amount Paid Early times the Days Early times the
Rate Per Day.
<PAGE>
EXHIBIT D
AMORTIZATION SCHEDULE
<TABLE>
<CAPTION>
Interest Rate 8% Payment 7,494.57
Principal Interest Payment Balance
<S> <C> <C> <C> <C>
15-Jul-99 239,959.71 799.87 7,494.57 233,265.01
15-Aug-99 233,265.01 1,555.10 7,494.57 227,325.54
15-Sep-99 227,325.54 1,515.50 7,494.57 221,346.47
15-Oct-99 221,346.47 1,475.64 7,494.57 215,327.54
15-Nov-99 215,327.54 1,435.52 7,494.57 209,268.49
15-Dec-99 209,268.49 1,395.12 7,494.57 203,169.04
15-Jan-00 203,169.04 1,354.46 7,494.57 197,028.93
15-Feb-00 197,028.93 1,313.53 7,494.57 190,847.89
15-Mar-00 190,847.89 1,272.32 7,494.57 184,625.64
15-Apr-00 184,625.64 1,230.84 7,494.57 178,361.91
15-May-00 178,361.91 1,189.08 7,494.57 172,056.42
15-Jun-00 172,056.42 1,147.04 7,494.57 165,708.89
15-Jul-00 165,708.89 1,104.73 7,494.57 159,319.04
15-Aug-00 159,319.04 1,062.13 7,494.57 152,886.60
15-Sep-00 152,886.60 1,019.24 7,494.57 146,411.28
15-Oct-00 146,411.28 976.08 7,494.57 139,892.78
15-Nov-00 139,892.78 932.62 7,494.57 133,330.83
15-Dec-00 133,330.83 888.87 7,494.57 126,725.13
15-Jan-01 126,725.13 844.83 7,494.57 120,075.40
15-Feb-01 120,075.40 800.50 7,494.57 113,381.33
15-Mar-01 113,381.33 755.88 7,494.57 106,642.63
15-Apr-01 106,642.63 710.95 7,494.57 99,859.01
15-May-01 99,859.01 665.73 7,494.57 93,030.17
15-Jun-01 93,030.17 620.20 7,494.57 86,155.80
15-Jul-01 86,155.80 574.37 7,494.57 79,235.60
15-Aug-01 79,235.60 528.24 7,494.57 72,269.27
15-Sep-01 72,269.27 481.80 7,494.57 65,256.50
15-Oct-01 65,256.50 435.04 7,494.57 58,196.97
15-Nov-01 58,196.97 387.98 7,494.57 51,090.38
15-Dec-01 51,090.38 340.60 7,494.57 43,936.41
15-Jan-02 43,936.41 292.91 7,494.57 36,734.75
15-Feb-02 36,734.75 244.90 7,494.57 29,485.08
15-Mar-02 29,485.08 196.57 7,494.57 22,187.08
15-Apr-02 22,187.08 147.91 7,494.57 14,840.42
15-May-02 14,840.42 98.94 7,494.57 7,444.79
15-Jun-02 7,444.79 49.63 7,494.57 (0.15)
</TABLE>
Exhibit 10.59
SOURCE LICENSE AGREEMENT
This Source License Agreement (the "Agreement"), dated July 13, 1999, is
entered into by and between Celerity Solutions, Inc., a Delaware corporation,
with offices at 270 Bridge Street, Suite 301, Dedham, Massachusetts, 02026
("Licensor"), and HotStatus Enterprises, Inc., a California corporation, with
offices at 22581 Summerfield, Mission Viejo, California, 92692 ("Licensee").
RECITALS
A. Licensor is the owner of certain computer software.
B. Licensee desires to obtain a license to use such software, and Licensor
desires to grant such a license, upon and subject to the terms and conditions
contained in this Agreement.
AGREEMENT
In consideration of the foregoing recitals and the mutual covenants set
forth below, the parties hereto agree as follows:
1. Definitions. For purposes of this Agreement, each of the following terms
shall have the meaning stated in this Section 1:
1.1 Licensed Software. "Licensed Software" shall mean (a) the WMS
Client Server Software, (b) the WMS COBOL Software, (c) the Swor Software,
and (d) the Transportation COBOL Software.
1.2 Swor Software. "Swor Software" shall mean the "Work", the "Portion
of the Foundation" and the "Development Tools", as defined in that certain
letter agreement dated June 24, 1997 between James Swor and Somerset
Automation, Inc., a copy of which is attached hereto as Exhibit A.
1.3 WMS Client Server Software. "WMS Client Server Software" shall
mean the Source Code and Object Code for that certain software, the Source
Code of which is described on Exhibit B attached hereto.
1.4 WMS COBOL Software. "WMS COBOL Software" shall mean the Source
Code and Object Code for that certain software, the Source Code of which is
described on Exhibit C attached hereto.
<PAGE>
1.5 Transportation COBOL Software. "Transportation COBOL Software"
shall mean the Source Code and Object Code for that certain software, the
Source Code of which is described on Exhibit D attached hereto.
1.6 Documentation. "Documentation" shall mean technical, user and
marketing materials pertaining to the Licensed Software, together with
other materials created by Licensor to facilitate the usage of Third Party
Tools, all as the same shall exist on the date of this Agreement (except
for the Documentation referred to in Section 3.5 below). Such materials
include, without limitation, procedures manuals, text to the on-line help,
database schematics, program specifications, functional specifications,
flow charts, white papers, published bug lists and features lists.
1.7 Enhancement. "Enhancement" shall mean (a) any new version, update
or release of the Licensed Software or the Documentation or any prior
Enhancement, (b) any change or addition that, when made or added to the
Licensed Software or Documentation or any prior Enhancement, changes its
utility, efficiency or functional capability, or (c) any change or addition
that, when made or added to the Licensed Software or Documentation or any
prior Enhancement, corrects an error, or a procedure or routine that, when
observed eliminates the adverse effect of that error on the Licensed
Software, Documentation or prior Enhancement.
1.8 Licensor Enhancements. "Licensor Enhancements" shall mean
Enhancements which are developed by Licensor.
1.9 Licensee Enhancements. "Licensee Enhancements" shall mean
Enhancements which are developed by Licensee.
1.10 Derivative Works. "Derivative Works" shall mean any Enhancement
or other work that is based upon the Licensed Software or Documentation or
a prior Derivative Work thereof, such as a revision, modification,
translation, abridgement, condensation, expansion, or any other form in
which such preexisting works may be recast, transformed, or adapted, and
that, if prepared without authorization of the owner of the copyright in
such preexisting work, would constitute a copyright infringement.
1.11 Third Party Tools. "Third Party Tools" shall mean all of the
third party software utilized by Licensor to support the creation,
development, maintenance and installation of the Licensed Software
including, without limitation, the Third Party Tools identified on Exhibit
E.
1.12 Source Code. "Source Code" shall mean computer programming code
in a form that a human, familiar with computer language, may deduce with
reasonable ease, or in an encoded machine readable form, such as
recordation on a magnetic tape or floppy disk, which can be processed by a
computer to produce a printed document that a human, familiar with computer
language, may deduce with reasonable ease.
<PAGE>
1.13 Object Code. "Object Code" shall mean computer programming code
that results when a computer translates or processes Source Code into
machine language intermediate code that is not convenient to human
understanding of the program logic, but which is appropriate for execution
or interpretation by a computer.
1.14 Year 2000 Compliant. "Year 2000 Compliant" shall mean that (a)
the WMS Client Server Software as of the date of this Agreement accurately
processes, provides and/or receives all date/time data (including
calculating, comparing and sequencing) within, from, into and between
centuries (including the twentieth and twenty-first centuries and the years
1999 and 2000), including leap year calculations, and (b) neither the
performance nor the functionality of the WMS Client Server Software will be
adversely affected in any material manner by any dates/times, prior to, on,
after or spanning January 1, 2000.
1.15 Primary Market. "Primary Market" shall mean any business entity
or individual, except for (a) those individuals or entities, as of the date
of this Agreement, who have purchased a license from Licensor to the
Licensed Software, which are listed on Exhibit F, and (b) those individuals
and entities who are listed on the Shared Leads List by Licensor pursuant
to Section 3.4. In the event of any dispute concerning the Shared Leads
List, the parties shall make reasonable efforts within three (3) business
days to resolve such dispute with the participation of the President and/or
Chief Executive Officer of the Licensor and the Licensee, provided that, if
the parties are unable to resolve such dispute within three (3) business
days, such disputed leads shall be assigned alternatively to Licensor and
Licensee with the first such disputed lead assigned to Licensor.
1.16 Exclusive Period. "Exclusive Period" shall mean the period
commencing on the date of this Agreement and ending on the earliest to
occur of (a) the date Licensor files, or has filed against it, a petition
or other action under any federal or state bankruptcy or debtor relief
laws, or makes an assignment for the benefit of its creditors or (b) the
fifth anniversary of the date of this Agreement, or (c) the date on which
the Maximum Fees have been paid to Licensor.
2. Title.
2.1 Licensor Title. Licensee acknowledges and agrees that, as between
Licensor and Licensee, all right, title and interest in and to (a) the
Licensed Software and the Documentation, as they exist as of the date of
this Agreement, (b) all Licensor Enhancements, (c) all Derivative Works
prepared by Licensor and (d) all copyrights and other intellectual property
rights with respect to the items referred to in clauses (a), (b) and (c),
shall be owned exclusively by Licensor.
<PAGE>
2.2 Licensee Title. Licensor acknowledges and agrees that, as between
Licensor and Licensee, all right, title and interest in and to (a) all
Licensee Enhancements, (b) all Derivative Works prepared by Licensee
(subject to Licensor's ownership of the preexisting work from which the
Derivative Work is derived, if applicable), and (c) all copyrights and
other intellectual property rights with respect to the items referred to in
clauses (a) and (b), shall be owned exclusively by Licensee.
3. Grant of License.
3.1 Grant of License by Licensor. Subject to the terms and conditions
contained in this Agreement, Licensor hereby grants to Licensee a
perpetual, worldwide, irrevocable, non-exclusive, assignable, transferable
and sub-licensable license to (a) use (for any purpose), execute,
reproduce, market and distribute the Licensed Software and Documentation,
all Licensee Enhancements and other Derivative Works, and (b) make Licensee
Enhancements and other Derivative Works.
3.2 Limitation on Exercise of License. Notwithstanding Section 3.1
above, Licensee shall not, during the Exclusive Period, without the express
prior written consent of Licensor, directly or indirectly, license,
sublicense, sell, assign or otherwise transfer the Licensed Software, or
any Licensee Enhancements to (a) any individual or business entity which is
not in the Primary Market or (b) any business entity or individual that is
a Direct Competitor of Licensor. For purposes of the foregoing, the term
"Direct Competitor" shall mean an individual or entity that markets or
distributes application software with functions similar to the licensed WMS
Client Server Software or the WMS COBOL Software. A Direct Competitor shall
not include individuals or entities which utilize the Licensed Software
exclusively for their own internal purposes.
3.3 Exclusivity. During the period commencing on the date of this
Agreement and ending on the fifth anniversary of the date of this
Agreement, Licensor shall not, without the express prior written consent of
Licensee, directly or indirectly engage in the marketing, distribution or
licensing of the Licensed Software to (a) any individual or business entity
which has purchased a license from Licensee to the Licensed Software or any
Licensee Enhancements, (b) those individuals or business entities, who,
after the date of this Agreement, have been listed by the Licensee on the
Shared Leads List in accordance with Section 3.4.
3.4 Shared Leads List. Those individuals or business entities, who,
during the Exclusive Period, have been verbally contacted by one party to
this Agreement prior to the other party to this Agreement and such contact
has shown reasonable interest in purchasing a license to the Licensed
Software, or in the case of the Licensor, any Licensor Enhancements, or in
the case of the Licensee, any Licensee Enhancements, shall be placed on a
shared leads list (the "Shared Leads List") by the Licensor or the
Licensee, as the case may be. The Shared Leads List shall include the
individuals or business entities contacted, the date of first contact, who
was contacted, and the level of interest by such contact. Any business
entity or individual which is placed on the Shared Leads List by the
Licensor or the Licensee, as the case may be, and which has not purchased a
license of the Licensed Software or the Licensor Enhancements or Licensee
Enhancements as aforesaid within nine (9) months from having been placed on
the Shared Leads List shall expire and shall be deemed for all purposes
following such date to be removed from such list. Following such removal
such business entity or individual may be placed on the Shared Leads List
by the party which did not last place such entity or individual on the
Shared Leads List (or, following the expiration of thirty days following
such removal, by the party which last placed such entity on the Shared
Leads List) .. Notwithstanding the foregoing, in no event shall the
Licensor or Licensee list on the Shared Leads List at any one time more
than the greater of forty (40) individuals or entities or twenty (20)
individuals or entities per full time sales or full time sales support
persons employed by the Licensor or the Licensee, as the case may be. The
initial Shared Leads List is attached hereto as Exhibit G.
<PAGE>
3.5 Windows NT Version of Licensed Software. When and if developed by
the Licensor, the Licensor shall promptly deliver to the Licensee the
Windows NT Version of the Licensed Software and related Documentation on
the same terms and conditions as are applicable to the Licensed Software
and Documentation hereunder and following any such development and
delivery, the term "Licensed Software" and "Documentation" shall include
for all purposes the Windows NT Version thereof and related Documentation
respectively.
4. General Terms.
4.1 Term. The term of this Agreement shall commence on the date of
this Agreement and shall continue in perpetuity (or for the longest period
of time otherwise permitted by law), unless sooner terminated by Licensee
as provided in Section 4.2 below.
4.2 Acceptance of Licensed Software; Termination. Within thirty (30)
days following the date of this Agreement, Licensor shall deliver to
Licensee (a) copies of the Licensed Software (in both Object Code and
Source Code form), including the most recent version thereof and all prior
versions, and (b) copies of the Documentation. Licensee shall have a period
of time not to exceed sixty days following the delivery of the foregoing to
review the same. In the event that Licensee determines that the Licensed
Software and Documentation are satisfactory, Licensee shall provide
Licensor with written notice of acceptance thereof. Upon receipt of
Licensee's written notice of acceptance, Licensor and Licensee shall
promptly execute and deliver a Forbearance Agreement in the form attached
hereto as Exhibit H. In the event that (A) Licensee determines that the
Licensed Software and/or Documentation is/are unsatisfactory for any
reason, in its sole and absolute discretion, or (B) Licensor, upon receipt
of a written notice of acceptance, shall fail to promptly execute and
deliver the foregoing agreements, Licensee may terminate this Agreement
upon delivery to Licensor of written notice of termination.
<PAGE>
4.3 License Fees.
(a) In consideration of the rights granted to Licensee under this
Agreement, Licensee shall pay a license fee to Licensor of $200,000 (the
"Initial Fee"), plus royalty fees ("Royalty Fees") payable based on the
licensing fees booked by Licensee from its customers for the Licensed
Software, as follows:
Year 1 = 50% of licensing fees booked by Licensee
Year 2 = 40% of licensing fees booked by Licensee
Year 3 = 30% of licensing fees booked by Licensee
Year 4 = 20% of licensing fees booked by Licensee
Year 5 = 10% of licensing fees booked by Licensee
(b) For purposes of this Agreement, "Year 1" shall be the twelve month
period commencing on the date of this Agreement, "Year 2" shall be the
twelve month period commencing on the first anniversary of the date of this
Agreement, "Year 3" shall be the twelve month period commencing on the
second anniversary of the date of this Agreement, and so on. From and after
Year 5, all of the rights granted to Licensee under this Agreement shall be
fully paid up and royalty-free.
(c) Notwithstanding the foregoing, if Licensee has failed to pay
Royalty Fees to Licensor in the amount of not less than an aggregate of
$500,000 prior to the end of Year 5, the Licensee shall continue to pay
Royalty Fees to Licensor at the rate of 10% of licensing fees actually
received by Licensee in each year subsequent to the end of Year 5 until
such time as the aggregate Royalty Fees paid by Licensee to Licensor
hereunder shall equal $500,000. Notwithstanding any of the terms or
provisions of this Agreement, in no event shall the aggregate of the
Initial Fee and the Royalty Fees to be paid by Licensee to Licensor
hereunder exceed $1,750,000 (the "Maximum Fees"). For purposes of the
foregoing, amounts paid to Luc Ringuette pursuant to Section 4.5 below and
amounts withheld pursuant to Section 5 and/or Section 10.2 shall be deemed
to be Royalty Fees paid to the Licensor.
(d) Licensee will pay the Initial Fee through a reduction in the
outstanding amount owed by Licensor under that certain Non-Negotiable
Promissory Note and Security Agreement dated December 8, 1997 in the
original principal amount of $448,116 executed by Licensor in favor of Luc
Ringuette (the "Ringuette Note"). For purposes of this Agreement, licensing
fees shall be "booked" by Licensee upon the execution by Licensee of a
binding agreement with a third party with respect to the Licensed Software,
provided, however, that Licensee shall pay the Royalty Fees related to such
booked revenue within ten (10) days following Licensee's receipt from its
customers of the licensing fees to which such Royalty Fees relate.
<PAGE>
4.4 Minimum Royalty Fees. Notwithstanding paragraph (a) of Section 4.3
above, but subject to paragraph (c) of Section 4.3, the minimum per server
Royalty Fee during Years 1 through 5 shall not be less than the amounts
specified on Exhibit I attached hereto based upon the year in which the
license fee in question is booked.
4.5 Earn-Out Payments to Luc Ringuette. Notwithstanding the foregoing,
Licensee shall deduct and pay to Luc Ringuette, as payments on the
Ringuette Note, 50% of the Royalty Fees otherwise payable to Licensor,
until the Ringuette Note has been paid in full.
5. Year 2000 Complaint. Licensor shall use reasonable efforts to correct
errors in the WMS Client Server Software and the Swor Software which causes the
WMS Client Server Software and the Swor Software to be non-Year 2000 Complaint.
Upon discovering any such error, Licensee and Licensor shall submit a written
detailed report to the other party describing such error. Licensor shall then
use reasonable efforts to correct the error, provided, however, that if Licensor
acknowledges in writing its inability to correct any error or fails to correct
such error within a reasonable time following the discovery thereof, the
Licensee may develop License Enhancements to correct such error and offset the
reasonable cost of such error correction against Royalty Fees otherwise payable
by Licensee to Licensor pursuant to Section 4.3. If Licensee develops such
Licensee Enhancements, Licensee shall deliver the same to Licensor without cost
to Licensor (other than the offset to the Royalty Fees referred to above) upon
Licensor's execution and delivery to Licensee of a license agreement with
respect thereto in such form as may reasonably be requested by Licensee.
6. Protection of Proprietary Rights.
6.1 Confidentiality Obligations of Licensee; Copyright Notices.
Licensee shall protect the confidentiality of the Licensed Software, the
Documentation, and all Licensor Enhancements, using at least as great a
degree of care as it uses in protecting its own highly valuable and
confidential trade secrets, but no less than a reasonable degree of care
under the circumstances. Licensee shall not remove from any copies of the
Licensed Software, the Documentation, or any Licensor Enhancements any
copyright notice of Licensor appearing thereon, and shall include such
copyright notice at the appropriate place on each copy of the Licensed
Software, the Documentation, and all Licensor Enhancements made by
Licensee.
6.2 Trademarks. Licensee acknowledges that Licensor shall continue to
exclusively own all right, title and interest in and to all trademarks
currently used by Licensor in connection with the Licensed Software and the
Documentation and Licensee further acknowledges and agrees that it shall
not, except as expressly authorized by this Agreement,in any way utilize
such trademarks without the express written consent of Licensor.
Notwithstanding the foregoing but subject to the terms and conditions
contained in this Agreement, Licensor hereby grants Licensee a
non-exclusive, assignable, transferrable and sub-licensable license to use,
for a period of two (2) years from the date of this Agreement, any and all
trademarks and logos of Licensor, which Licensor has heretofore used in
connection with the marketing, distribution and/or licensing of the
Licensed Software. Following such two-year period, Licensee shall cease the
use of all such trademarks and logos and shall cause any third party to
which Licensee has licensed, sublicensed, assigned or otherwise transferred
the right to use such trademarks to also cease the use of the same.
<PAGE>
6.3 Confidentiality Obligations of Licensor; Copyright Notices.
Licensor shall protect the confidentiality of all Licensee Enhancements,
using at least as great a degree of care as it uses in protecting its own
highly valuable and confidential trade secrets, but no less than a
reasonable degree of care under the circumstances. Licensor shall not
remove from any copies of the Licensee Enhancements any copyright notice of
Licensee appearing thereon, and shall include such copyright notice at the
appropriate place on each copy of the Licensee Enhancements made by
Licensor.
6.4 Residuals. Each of the parties acknowledges that during the course
of the exercise of the rights and obligations granted or imposed by this
Agreement the parties will be given access to confidential information
belonging to each other. Each of the parties shall be free, either during
the term of this Agreement or thereafter, to use for any purpose the
"residuals" resulting from access to or work with such confidential
information. The term "residuals" for purposes of this Agreement shall mean
non-confidential information which may be retained by either party,
including non-confidential ideas, concepts, know-how or techniques
contained therein. Accordingly, but without limiting the generality of the
foregoing, either party shall be free to use "residuals" to develop
software which is similar to and/or competitive with software belonging to
either party to which either party is given access during the course of the
exercise of the rights and obligations granted or imposed under this
Agreement, and the other party shall neither have any right, title or
interest therein, nor shall it be entitled to receive royalties with
respect thereto.
6.5 Limitations on Confidentiality. The restrictions set forth in
Sections 6.1 and 6.3 above respecting confidentiality shall not apply to
any material which is (a) rightfully in the public domain; (b) rightfully
received by the receiving party from a third party without any obligation
of confidentiality imposed by the owner of the material in question or
applicable law; (c) rightfully known to the receiving party without any
limitation on use or disclosure prior to its receipt from the other party;
(d) independently developed by personnel of the receiving party; or (e)
generally made available to third parties by the owner of the material in
question without restriction on disclosure. In the event that either party
is requested or required by any tribunal, court or governmental agency (by
oral questions, interrogatories, requests for information or documents,
subpoena, civil investigative demand, formal request or similar process) to
disclose the confidential material of the other party, the party who has
been so requested or required shall provide the other party with prompt
notice of such request(s) so that such party may seek an appropriate
protective order and/or waive the other party's compliance with the
provisions of Section 6.1 or 6.3, as the case may be. If, in the absence of
a protective order or the receipt of a waiver from the owner of the
material in question, the other party is nevertheless advised by its
counsel in writing that it is required under applicable law to disclose the
information so requested to such tribunal, court or governmental agency,
such party may disclose such information to such tribunal, court or
governmental agency without liability under this Agreement.
<PAGE>
7. Competitive Software; Competition. Licensor acknowledges that Licensee
may at any time after the date of this Agreement develop, market, distribute
and/or license software products similar to and/or competitive with the Licensed
Software, the Licensor Enhancements and/or the Licensee Enhancements, and that
nothing contained in this Agreement shall limit in any way Licensee's right to
do so.
8. Disclaimer of Warranties.
8.1 Disclaimer of Licensor's Warranties. Licensee acknowledges and
agrees that, except as stated in Section 9 below and Section 5 above, the
Licensed Software and Documentation will be provided to Licensee "as is."
EXCEPT AS SPECIFICALLY PROVIDED, IN THIS AGREEMENT LICENSOR EXPRESSLY
DISCLAIMS ANY AND ALL WARRANTIES PERTAINING TO THE LICENSED SOFTWARE AND
THE DOCUMENTATION, OR THE USE THEREOF, INCLUDING BUT NOT LIMITED TO, ALL
WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE.
9. Representations and Warranties.
9.1 Representations and Warranties by Licensor. Licensor hereby
represents and warrants to Licensee that (a) Licensor is the sole owner of
all right, title and interest in and to the Licensed Software and the
Documentation as the same exist as of the date of this Agreement, and of
all copyrights and other intellectual property rights with respect thereto,
(b) Licensor will be the sole owner of all right, title and interest in and
to any and all Licensor Enhancements which may hereafter be delivered by
Licensor to Licensee, and of all copyrights and other intellectual property
rights with respect thereto, and (c) Licensee's exercise of the rights
granted to it under this Agreement with respect to the Licensed Software,
the Documentation and all Licensor Enhancements will not violate any
copyright or other intellectual property right of any other person or
entity.
10. Additional Covenants.
10.1 Hiring of Employees. Licensor and Licensee each acknowledge that
it would receive substantial value and that the other would be deprived of
the benefits of its work force if it were to hire any person who is, as of
the date of this Agreement, a full-time employee of the other party, unless
at least twelve months shall have elapsed between the termination of such
person's employment with one party and his or her hiring by the other
party. It is further acknowledged that a breach of this Section 10.1 would
result in injury to the non-breaching party that would be difficult or
impossible to accurately ascertain. Therefore, because of the impossibility
of ascertaining actual damages, it is agreed that in the event of a breach
of this Section 10.1, the breaching party will pay to the other party with
respect to each such breach the sum of Fifty Thousand Dollars ($50,000), as
liquidated damages and not as a penalty. The parties agree that the amount
of liquidated damages specified herein represents a reasonable
approximation of the damages which would be incurred as a result of the
breach of this Section 10.1.
<PAGE>
10.2 Third Party Tools. Licensor shall, commencing on the date of this
Agreement and ending six months after the date of this Agreement, update
all of its Third Party Tools such that the releases of the same utilized by
Licensor are available to Licensee from, and supported by, the vendors of
all such Third Party Tools, and shall ensure that the Licensed Software has
not been adversely affected by such upgrades. If Licensor is unable to
modify the Licensed Software to compile with the Third Party Tools that are
supported as of the date of this agreement by the Third Party Tools
vendors, then the Licensee may develop Licensee Enhancements to the
Licensed Software to enable it to work with the supported Third Party Tools
, and Licensee shall offset the cost of such Licensee Enhancements from any
Royalty Fees (see Section 4.3), and such offsets will terminate upon the
fifth anniversary of the date of this Agreement. For purposes of the
foregoing sentence, "cost" shall mean the actual cost of the employee 's
salary and benefits or the actual cost of the fees for consultants for the
reasonable time of developing the Licensee Enhancements to enable the
Licensed Software to compile with the supported Third Party Tools. If the
Licensee is unable to obtain supported Third Party Tools as a result of any
Third Party Tools upgrade issues, mentioned herein, the Licensor will
provide to the Licensee a transferred license for such Third Party Tools to
be reimbursed by the Licensee at the Licensor's cost for such license. If
Licensee develops Licensee Modifications as contemplated by the second
sentence of this Section 10.2, Licensee shall deliver such Licensee
Enhancements to Licensor without cost to Licensor (other than the offset to
Royalty Fees referred to above) upon Licensor's execution and delivery to
Licensee of a license agreement with respect thereto in such form as may
reasonably be requested by Licensee.
10.3 Termination of Prior Agreement. Licensor hereby terminates in its
entirety, effective as of the date of this Agreement, that certain
Consulting Agreement dated December 8, 1997 entered into by Licensor and
Luc Ringuette.
10.4 Customer Site Visits and References, and Support. Licensor and
Licensee each acknowledge the value of providing to each other customer
site visits and references, from each other's customers, in the sales and
marketing of the Licensed Software, the Licensor Enhancements and the
Licensee Enhancements. Therefore, both parties agree, that for a period of
1 year from the date of this Agreement, upon request and reasonable notice,
and with the customer's approval, to provide such customer site visits and
references to each other. Both parties also agree, for a period of 1 year
from the date of this Agreement, upon request and reasonable notice, to
provide the other party with sales and marketing and technical assistance
with respect to the sales and marketing of the Licensed Software, the
Licensor Enhancements and the Licensee Enhancements.
<PAGE>
11. Indemnification.
11.1 Indemnification by Licensor. Licensor shall indemnify, defend,
and hold Licensee harmless from and against any and all losses,
liabilities, claims, obligations, costs and expenses, including but not
limited to reasonable attorneys' fees, suffered or incurred by Licensee as
the result of the inaccuracy of any representation or warranty made by
Licensor in this Agreement, or the breach by Licensor of any of its
covenants or obligations under this Agreement; provided, however, that in
no event shall Licensor's liability hereunder exceed $200,000.
11.2 Indemnification by Licensee. Licensee shall indemnify, defend,
and hold Licensor harmless from and against any and all losses,
liabilities, claims, obligations, costs and expenses, including but not
limited to reasonable attorneys' fees, suffered or incurred by Licensor as
the result of the inaccuracy of any representation or warranty made by
Licensee in this Agreement, or the breach by Licensee of any of its
covenants or obligations under this Agreement.
12. Miscellaneous.
12.1 Modification. No amendment or addition to, or modification of,
any provision contained in this Agreement shall be effective unless fully
set forth in writing signed by both of the parties hereto.
12.2 Attorneys' Fees. In the event of any arbitration or proceeding
arising out of or related to this Agreement, the prevailing party shall be
entitled to recover from the other party all of the prevailing party's
costs and expenses incurred in connection with such arbitration or
proceeding, including court costs and reasonable attorneys' fees.
12.3 Choice of Law. This Agreement shall be governed by and construed
under the laws of the State of Delaware, irrespective of such state's
choice-of-law principles.
12.4 Entire Agreement. This Agreement constitutes the entire agreement
between the parties hereto pertaining to the subject matter hereof, and is
the final, complete and exclusive expression of the terms and conditions
thereof. All prior or contemporaneous agreements, representations,
negotiations and understandings of the parties hereto, oral or written,
express or implied, are hereby superseded and merged herein.
<PAGE>
12.5 Captions. The captions of the sections and subsections of this
Agreement are inserted solely for convenience of reference and are not a
part of and are not intended to govern, limit or aid in the construction of
any term or provision hereof.
12.6 General Interpretation. The terms of this Agreement have been
negotiated by the parties hereto and the language used in this Agreement
shall be deemed to be the language chosen by the parties hereto to express
their mutual intent. This Agreement shall be construed without regard to
any presumption or rule requiring construction against the party causing
such instrument or any portion thereof to be drafted, or in favor of the
party receiving a particular benefit under the agreement. No rule of strict
construction will be applied against any person.
12.7 Notices. All notices, requests, demands, and other communications
required to or permitted to be given under this Agreement shall be in
writing and shall be conclusively deemed to have been duly given (i) when
hand delivered to the other party; or (ii) when received when sent by telex
or facsimile at the address and number set forth below (provided, however,
that notices given by facsimile shall not be effective unless either (a) a
duplicate copy of such facsimile notice is promptly given by depositing the
same in a United States post office with first-class postage prepaid and
addressed to the parties as set forth below, or (b) the receiving party
delivers a written confirmation of receipt for such notice either by
facsimile or any other method permitted under this Section; additionally,
any notice given by telex or facsimile shall be deemed received on the next
business day if such notice is received after 5:00 p.m. (recipient's time)
or on a nonbusiness day); or (iii) three (3) business days after the same
have been deposited in a United States post office with first class or
certified mail return receipt requested postage prepaid and addressed to
the parties as set forth below; or (iv) the next business day after the
same have been deposited with a national overnight delivery service
reasonably approved by the parties (Federal Express and DHL WorldWide
Express being deemed approved by the parties), postage prepaid, addressed
to the parties as set forth below with next-business-day delivery
guaranteed, provided that the sending party receives a confirmation of
delivery from the delivery service provider.
If to Licensor:
Celerity Solutions, Inc.
270 Bridge Street
Suite 301
Dedham, MA 02026
Attention: Chief Executive Officer
FAX (781) 329-1655
<PAGE>
If to Licensee:
HotStatus Enterprises, Inc.
23120 Alicia Parkway
Suite 206
Mission Viejo, CA 92692
Attention: Luc Ringuette
FAX (214) 953-7556
Each party shall make an ordinary, good faith effort to ensure that it will
accept or receive notices that are given in accordance with this Section,
and that any person to be given notice actually receives such notice. A
party may change or supplement the addresses given above, or designate
additional addresses, for purposes of this Section by giving the other
party written notice of the new address in the manner set forth above.
12.8 Relationship of Parties. Each party acknowledges that it is an
independent entity and is not subject to the control of the other party in
any manner except as otherwise expressly provided herein. Nothing contained
herein shall be construed to constitute the parties as partners or joint
venturers, or to render either party liable for any of the debts or
obligations of the other party. Neither party has any authority to bind the
other party in any manner whatsoever except as otherwise expressly provided
herein.
12.9 Counterparts. This Agreement may be executed in two (2) or more
counterparts, each of which shall be deemed an original but all of which
taken together shall constitute but one and the same instrument.
12.10 Successors and Assigns. This Agreement shall inure to the
benefit of and be binding upon the parties hereto and their respective
heirs, representatives, successors and assigns, provided, however, that
during the Exclusive Period, Licensee may not assign this Agreement or any
right to the Licensed Software to any Direct Competitor.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Source License
Agreement.
CELERITY SOLUTIONS, INC.
By:______________________________________
Its:______________________________________
HOTSTATUS ENTERPRISES, INC.
By:_______________________________________
Its:______________________________________
The undersigned acknowledges and agrees (i) that
the payment of the Initial Fee referenced in
Section 4.3 shall be paid by a reduction of the
outstanding amount owed on the Ringuette Note,
(ii) to accept the payments referenced in Section
4.5 in satisfaction of amounts due under the
Ringuette Note and (iii) to be bound by the terms
of Section 10.3.
______________________________________
Luc Ringuette
<PAGE>
EXHIBIT A
LETTER AGREEMENT WITH JIM SWOR DATED JUNE 24, 1997
This exhibit was not considered material information and therefore has not been
included in the filing July 13, 1999 10K filing.
<PAGE>
EXHIBIT B
DESCRIPTION OF WMS CLIENT SERVER SOFTWARE
The WMS Client Server Software is all of the client-server software that
Celerity obtained through the acquisition of Somerset Automation, Inc., on
December 8, 1997, plus all of the subsequent versions which have been developed
from the date of that acquisition through the date of this Agreement. Without
limiting the generality of the foregoing, the WMS Client Server Software is
further defined, without any limitation, as a system that (a) provides receiving
through shipping functionality, in paper and/or radio frequency modes, for the
management of material and labor throughout a warehouse and/or multiple
warehouses from one computer, (b) transfers information with various customer
systems either through a customer specific interface or as a non-custom
parameter file based and real-time driven interface, (c) interfaces with
material handling devices such as conveyors, carousels, hand held, and bar code
equipment, (d) utilizes many Third Party Tools for the development and
maintenance of its versions, and (e) incorporates all of the functionality at
the Licensor's past and/or current customers.
Capitalized terms which are used in this Description of WMS Client Server
Software and which are not otherwise defined herein shall have the meaning given
to them in the Agreement.
<PAGE>
EXHIBIT C
DESCRIPTION OF WMS COBOL SOFTWARE
The WMS COBOL Software is all of the COBOL software that Celerity obtained
through the acquisition of Somerset Automation, Inc., on December 8, 1997, plus
all of the subsequent versions which have been developed from the date of that
acquisition through the date of this Agreement. Without limiting the generality
of the foregoing, the WMS COBOL Software is further defined, without any
limitation, as a system that (a) provides receiving through shipping
functionality, in paper and/or radio frequency modes, for the management of
material and labor throughout a warehouse and/or multiple warehouses from one
computer, (b) transfers information with various customer systems either through
a customer specific interface or as a non-custom standard Electronic Data
Interchange interface, (c) interfaces with material handling devices such as
conveyors, carousels, hand held, and bar code equipment, (d) interfaces in both
real time and batch mode with the Transportation COBOL Software, (e) utilizes
many Third Party Tools for the development and maintenance of its versions, and
(f) incorporates all of the functionality at the Licensor's past and/or current
customers.
Capitalized terms which are used in this Description of WMS COBOL Software
and which are not otherwise defined herein shall have the meaning given to them
in the Agreement.
<PAGE>
EXHIBIT D
DESCRIPTION OF TRANSPORTATION COBOL SOFTWARE
The Transportation COBOL Software is all of the COBOL software that
Celerity obtained through the acquisition of Somerset Automation, Inc., on
December 8, 1997, plus all of the subsequent versions which have been developed
from the date of that acquisition through the date of this Agreement. Without
limiting the generality of the foregoing, the Transportation COBOL Software is
further defined, without any limitation, as a system that (a) provides carrier
selection through customer freight invoicing functionality for the management of
transportation vehicles and labor throughout a transportation operation and/or
multiple transportation operations from one computer, (b) transfers information
with various customer systems through a non-custom parameter file based standard
Electronic Data Interchange interface, (c) interfaces in both real time and
batch mode with the WMS COBOL Software, (d) utilizes many Third Party Tools for
the development and maintenance of its versions, and (e) incorporates all of the
functionality at the Licensor's past and/or current customers.
Capitalized terms which are used in this Description of Transportation COBOL
Software and which are not otherwise defined herein shall have the meaning given
to them in the Agreement.
<PAGE>
EXHIBIT E
THIRD PARTY TOOLS
<TABLE>
<CAPTION>
Tool Name Tool Description Purpose
<S> <C> <C>
Oracle 7.3.x Relational Database WMS Server Engine
Personal Oracle 7.3.x Relational Database for Laptop WMS Server Engine for demos on Laptop
Delphi 3.02 Development Version Client Development Environment WMS Client
SQR 4.3 Visual Scribe Report writer WMS Reports
Microsoft Visual C++ Programming Language WMS RF
Pro-C Compiler 2.2.4 Pre Compiler for C WMS RF to pre-compile SQL based C code into C
code
Vermont Views Libraries 4.05 Emulation package WMS RF
WinRunner 5.1 Automated Testing Testing
ERWIN Version 4 Database documentation Documentation/printouts of the database
schema and relationships
Star Team Version 4 Version Control Version Control
SQL Navigator Oracle PL/SQL debugger Debugging PL/SQL code running on the server
PL/SQL Oracle Debugger Oracle PL/SQL debugger Debugging PL/SQL code running on the server
Doc to Help Online Help documentation Tool Creation of online documentation for help
screens integrated into the application
ACU-COBOL 85 Programming language Development of the ACU-COBOL based products
TCAL Telxon hand held programming language Development of the TELXON hand helds
KEDIT DOS Editor for the programming language Text editor used to create and modify the
COBOL code
RCS Version Control Software Version Control for the ACU-COBOL applications
MKS Toolkit UNIX environment emulation for DOS and Creates a UNIX shell environment for creating
Windows shell scripts and tools in a DOS or Windows
environment that run in a UNIX environment
Exceed Terminal Emulation Package Allows PC's to emulate different types of
terminals for access to servers running
operating systems such as UNIX
Visio Professional Flow charting tool Software to assist in the creation of flow
charts
</TABLE>
<PAGE>
EXHIBIT F
CURRENT LICENSEES
This exhibit was not considered material information and therefore has not been
included in the filing July 13, 1999 10K filing.
<PAGE>
EXHIBIT G
INITIAL SHARED LEADS LIST
This exhibit was not considered material information and therefore has not been
included in the filing July 13, 1999 10K filing.
<PAGE>
EXHIBIT H
FORBEARANCE AGREEMENT
This exhibit was not considered material information and therefore has not been
included in the filing July 13, 1999 10K filing.
<PAGE>
EXHIBIT I
MINIMUM ROYALTY FEES
<TABLE>
<CAPTION>
Products Year 1 Year 2 Year 3 Year 4 Year 5
<S> <C> <C> <C> <C> <C>
UNIX-based Radio Frequency Enabled WMS $30,000 $24,000 $18,000 $12,000 $ 6,000
UNIX-based Non-Radio Frequency Enabled WMS $22,500 $18,000 $13,500 $ 9,000 $ 4,500
NT Radio Frequency Enabled WMS $22,500 $18,000 $13,500 $ 9,000 $ 4,500
NT Non-Radio Frequency Enabled WMS $15,000 $12,000 $ 9,000 $ 6,000 $ 3,000
</TABLE>
Exhibit 10.60
SOURCE LICENSE AGREEMENT
This Source License Agreement (the "Agreement"), dated July 13, 1999, is
entered into by and between Celerity Solutions, Inc., a Delaware corporation,
with offices at 270 Bridge Street, Suite 301, Dedham, Massachusetts, 02026
("Licensor"), and Paul Carr, currently the CEO of Celerity Solutions Inc. whose
home address is 2 Monadnock Road, Wellesley MA 02181 ("Licensee").
RECITALS
A. Licensor is the owner of certain computer software.
B. Licensee desires to obtain a license to use such software, and Licensor
desires to grant such a license, upon and subject to the terms and conditions
contained in this Agreement.
AGREEMENT
In consideration of the foregoing recitals and the mutual covenants set
forth below, the parties hereto agree as follows:
1. Definitions. For purposes of this Agreement, each of the following terms
shall have the meaning stated in this Section 1:
1.1 Licensed Software. "Licensed Software" shall mean the Supply Chain
Planner Software.
1.2 Supply Chain Planner Software. " SCP Software" shall mean the
Source Code and Object Code for that certain software, the Source Code of
which is described on Exhibit A attached hereto.
1.3 Documentation. " Documentation" shall mean technical, user and
marketing materials pertaining to the Licensed Software, together with
other materials created by Licensor to facilitate the usage of Third Party
Tools, all as the same shall exist on the date of this Agreement. Such
materials include, without limitation, procedures manuals, text to the
on-line help, database schematics, program specifications, functional
specifications, flow charts, white papers, published bug lists and features
lists.
1.4 Enhancement. "Enhancement" shall mean (a) any new version, update
or release of the Licensed Software or the Documentation or any prior
Enhancement, (b) any change or addition that, when made or added to the
Licensed Software or Documentation or any prior Enhancement, changes its
utility, efficiency or functional capability, or (c) any change or addition
that, when made or added to the Licensed Software or Documentation or any
prior Enhancement, corrects an error, or a procedure or routine that, when
observed eliminates the adverse effect of that error on the Licensed
Software, Documentation or prior Enhancement.
<PAGE>
1.5 Licensee Enhancements. "Licensee Enhancements" shall mean
Enhancements which are developed by Licensee.
1.6 Derivative Works. "Derivative Works" shall mean any Enhancement or
other work that is based upon the Licensed Software or Documentation or a
prior Derivative Work thereof, such as a revision, modification,
translation, abridgement, condensation, expansion, or any other form in
which such preexisting works may be recast, transformed, or adapted, and
that, if prepared without authorization of the owner of the copyright in
such preexisting work, would constitute a copyright infringement.
1.7 Third Party Tools. "Third Party Tools" shall mean all of the third
party software utilized by Licensor to support the creation, development,
maintenance and installation of the Licensed Software, without limitation,
the Third Party Tools identified on Exhibit B.
1.8 Source Code. "Source Code" shall mean computer programming code in
a form that a human, familiar with computer language, may deduce with
reasonable ease, or in an encoded machine readable form, such as
recordation on a magnetic tape or floppy disk, which can be processed by a
computer to produce a printed document that a human, familiar with computer
language, may deduce with reasonable ease.
1.9 Object Code. "Object Code"shall mean computer programming code
that results when a computer translates or processes Source Code into
machine language intermediate code that is not convenient to human
understanding of the program logic, but which is appropriate for execution
or interpretation by a computer.
2. Title.
2.1 Licensor Title. Licensee acknowledges and agrees that, as between
Licensor and Licensee, all right, title and interest in and to the Licensed
Software and the Documentation, as they exist as of the date of this
Agreement and all copyrights and other intellectual property rights with
respect to these items shall be owned exclusively by Licensor.
<PAGE>
2.2 Licensee Title. Licensor acknowledges and agrees that, as between
Licensor and Licensee, all right, title and interest in and to (a) all
Licensee Enhancements, (b) all Derivative Works prepared by Licensee
(subject to Licensor's ownership of the preexisting work from which the
Derivative Work is derived, if applicable), and (c) all copyrights and
other intellectual property rights with respect to the items referred to in
clauses (a) and (b), shall be owned exclusively by Licensee.
3. Grant of License.
3.1 Grant of License by Licensor. Subject to the terms and conditions
contained in this Agreement, Licensor hereby grants to Licensee a
perpetual, worldwide, irrevocable, non-exclusive, assignable, transferable
and sub-licensable license to (a) use (for any purpose), execute,
reproduce, market and distribute the Licensed Software, Documentation, all
Licensee Enhancements and other Derivative Works, and (b) make Licensee
Enhancements and other Derivative Works.
4. General Terms.
4.1 Term. The term of this Agreement shall commence on the date of
this Agreement and shall continue in perpetuity (or for the longest period
of time otherwise permitted by law), unless sooner terminated by either
Party as provided in Section 4.4 below.
4.2 Delivery of Licensed Software. Within thirty (30) days following
the date of this Agreement, Licensor shall deliver to Licensee (a) copies
of the Licensed Software (in both Object Code and Source Code form),
including the most recent version thereof and all prior versions, and (b)
copies of the Documentation.
4.3 License Fees. In consideration of the rights granted to Licensee
under this Agreement, Licensee shall pay a license fee to Licensor of
$200,000. Licensee will pay this fee through a reduction in the outstanding
amount owed by Licensor under that certain Non-Negotiable Promissory Note
and Security Agreement dated March 31, 1997 in the original principal
amount of $1,613,177 executed by Licensor in favor of Licensee.
4.4 Non-Compete. Licensee agrees not to license, sublicense, assigns,
sell or otherwise transfer the Licensed Software to a third party until the
early of (a) 12 months after Licensee leaves the employment of Licensor or
any successor in interest or (b) the date Licensor files, or has filed
against it, a petition or other action under any federal or state
bankruptcy or debtor relief laws, or makes an assignment for the benefit of
its creditors.
<PAGE>
5. Protection of Proprietary Rights.
5.1 Confidentiality Obligations of Licensee; Copyright Notices.
Licensee shall protect the confidentiality of the Licensed Software, and
the Documentation, using at least as great a degree of care as it uses in
protecting its own highly valuable and confidential trade secrets, but no
less than a reasonable degree of care under the circumstances. Licensee
shall not remove from any copies of the Licensed Software of the
Documentation, any copyright notice of Licensor appearing thereon, and
shall include such copyright notice at the appropriate place on each copy
of the Licensed Software, and the Documentation made by Licensee.
5.2 Trademarks. Licensee acknowledges that Licensor shall continue to
exclusively own all right, title and interest in and to all trademarks
currently used by Licensor in connection with the Licensed Software and the
Documentation and Licensee further acknowledges and agrees that it shall
not in any way utilize such trademarks without the express written consent
of Licensor.
5.3 Residuals. Each of the parties acknowledges that during the course
of the exercise of the rights and obligations granted or imposed by this
Agreement the parties will be given access to confidential information
belonging to each other. Each of the parties shall be free, either during
the term of this Agreement or thereafter, to use for any purpose the
"residuals" resulting from access to or work with such confidential
information. The term "residuals" for purposes of this Agreement shall mean
non-confidential information which may be retained by either party,
including non-confidential ideas, concepts, know-how or techniques
contained therein. Accordingly, but without limiting the generality of the
foregoing, either party shall be free to use "residuals" to develop
software which is similar to and/or competitive with software belonging to
either party to which either party is given access during the course of the
exercise of the rights and obligations granted or imposed under this
Agreement, and the other party shall neither have any right, title or
interest therein, nor shall it be entitled to receive royalties with
respect thereto.
5.4 Limitations on Confidentiality. The restrictions set forth in
Section 5.1 above respecting confidentiality shall not apply to any
material which is (a) rightfully in the public domain; (b) rightfully
received by the receiving party from a third party without any obligation
of confidentiality imposed by the owner of the material in question or
applicable law; (c) rightfully known to the receiving party without any
limitation on use or disclosure prior to its receipt from the other party;
(d) independently developed by personnel of the receiving party; or (e)
generally made available to third parties by the owner of the material in
question without restriction on disclosure. In the event that either party
is requested or required by any tribunal, court or governmental agency (by
oral questions, interrogatories, requests for information or documents,
subpoena, civil investigative demand, formal request or similar process) to
disclose the confidential material of the other party, the party who has
been so requested or required shall provide the other party with prompt
notice of such request(s) so that such party may seek an appropriate
protective order and/or waive the other party's compliance with the
provisions of Section 5 .1, as the case may be. If, in the absence of a
protective order or the receipt of a waiver from the owner of the material
in question, the other party is nevertheless advised by its counsel in
writing that it is required under applicable law to disclose the
information so requested to such tribunal, court or governmental agency,
such party may disclose such information to such tribunal, court or
governmental agency without liability under this Agreement.
<PAGE>
6. Competitive Software; Competition. Licensor acknowledges that
Licensee may at any time after termination of the Non-Compete period, as
mentioned in Section 4.5 contained herein, develop, market, distribute
and/or license software products similar to and/or competitive with the
Licensed Software and that nothing contained in this Agreement shall limit
in any way Licensee's right to do so.
7. Disclaimer of Warranties.
7.1 Disclaimer of Licensor's Warranties. Licensee acknowledges and
agrees that, except as stated in Section 8 below, the Licensed Software and
Documentation will be provided to Licensee "as is." EXCEPT AS SPECIFICALLY
PROVIDED, IN THIS AGREEMENT LICENSOR EXPRESSLY DISCLAIMS ANY AND ALL
WARRANTIES PERTAINING TO THE LICENSED SOFTWARE AND THE DOCUMENTATION, OR
THE USE THEREOF, INCLUDING BUT NOT LIMITED TO, ALL WARRANTIES OF
MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE.
8. Representations and Warranties.
8.1 Representations and Warranties by Licensor. Licensor hereby
represents and warrants to Licensee that (a) Licensor is the sole owner of
all right, title and interest in and to the Licensed Software and the
Documentation as the same exist as of the date of this Agreement, and of
all copyrights and other intellectual property rights with respect thereto,
(b) Licensee's exercise of the rights granted to it under this Agreement
with respect to the Licensed Software, and the Documentation will not
violate any copyright or other intellectual property right of any other
person or entity.
<PAGE>
8.2 Representations and Warranties by Licensee. Licensee hereby
represents and warrants to Licensor that (a) Licensor will be the sole
owner of all right, title and interest in and to any and all Licensee
Enhancements, and of all copyrights and other intellectual property rights
with respect thereto, and (b) Licensor's exercise of the rights granted to
it under this Agreement with respect to the Licensee Enhancements will not
violate any copyright or other intellectual property right of any other
person or entity.
9. Additional Covenants.
9.1 Hiring of Employees. Licensor and Licensee each acknowledge that
it would receive substantial value and that the other would be deprived of
the benefits of its work force if it were to hire any person who is, as of
the date of this Agreement, a full-time employee of the other party, unless
at least twelve months shall have elapsed between the termination of such
person's employment with one party and his or her hiring by the other
party. It is further acknowledged that a breach of this Section 9.1 would
result in injury to the non-breaching party that would be difficult or
impossible to accurately ascertain. Therefore, because of the impossibility
of ascertaining actual damages, it is agreed that in the event of a breach
of this Section 9.1, the breaching party will pay to the other party with
respect to each such breach the sum of Fifty Thousand Dollars ($50,000), as
liquidated damages and not as a penalty. The parties agree that the amount
of liquidated damages specified herein represents a reasonable
approximation of the damages which would be incurred as a result of the
breach of this Section 9.1.
10. Indemnification.
10.1 Indemnification by Licensor. Licensor shall indemnify, defend,
and hold Licensee harmless from and against any and all losses,
liabilities, claims, obligations, costs and expenses, including but not
limited to reasonable attorneys' fees, suffered or incurred by Licensee as
the result of the inaccuracy of any representation or warranty made by
Licensor in this Agreement, or the breach by Licensor of any of its
covenants or obligations under this Agreement; provided, however, that in
no event shall Licensor's liability hereunder exceed $200,000.
10.2 Indemnification by Licensee. Licensee shall indemnify, defend,
and hold Licensor harmless from and against any and all losses,
liabilities, claims, obligations, costs and expenses, including but not
limited to reasonable attorneys' fees, suffered or incurred by Licensor as
the result of the inaccuracy of any representation or warranty made by
Licensee in this Agreement, or the breach by Licensee of any of its
covenants or obligations under this Agreement.
<PAGE>
11. Miscellaneous.
11.1 Modification. No amendment or addition to, or modification of,
any provision contained in this Agreement shall be effective unless fully
set forth in writing signed by both of the parties hereto.
11.2 Attorneys' Fees. In the event of any arbitration or proceeding
arising out of or related to t his Agreement, the prevailing party shall be
entitled to recover from the other party all of the prevailing party's
costs and expenses incurred in connection with such arbitration or
proceeding, including court costs and reasonable attorneys' fees.
11.3 Choice of Law. This Agreement shall be governed by and construed
under the laws of the Commonwealth of Massachusetts, irrespective of such
state's choice-of-law principles.
11.4 Entire Agreement. This Agreement constitutes the entire agreement
between the parties hereto pertaining to the subject matter hereof, and is
the final, complete and exclusive expression of the terms and conditions
thereof. All prior or contemporaneous agreements, representations,
negotiations and understandings of the parties hereto, oral or written,
express or implied, are hereby superseded and merged herein.
11.5 Captions. The captions of the sections and subsections of this
Agreement are inserted solely for convenience of reference and are not a
part of and are not intended to govern, limit or aid in the construction of
any term or provision hereof.
11.6 General Interpretation. The terms of this Agreement have been
negotiated by the parties hereto and the language used in this Agreement
shall be deemed to be the language chosen by the parties hereto to express
their mutual intent. This Agreement shall be construed without regard to
any presumption or rule requiring construction against the party causing
such instrument or any portion thereof to be drafted, or in favor of the
party receiving a particular benefit under the agreement. No rule of strict
construction will be applied against any person.
<PAGE>
11.7 Notices. All notices, requests, demands, and other communications
required to or permitted to be given under this Agreement shall be in
writing and shall be conclusively deemed to have been duly given (i) when
hand delivered to the other party; or (ii) when received when sent by telex
or facsimile at the address and number set forth below (provided, however,
that notices given by facsimile shall not be effective unless either (a) a
duplicate copy of such facsimile notice is promptly given by depositing the
same in a United States post office with first-class postage prepaid and
addressed to the parties as set forth below, or (b) the receiving party
delivers a written confirmation of receipt for such notice either by
facsimile or any other method permitted under this Section; additionally,
any notice given by telex or facsimile shall be deemed received on the next
business day if such notice is received after 5:00 p.m. (recipient's time)
or on a nonbusiness day); or (iii) three (3) business days after the same
have been deposited in a United States post office with first class or
certified mail return receipt requested postage prepaid and addressed to
the parties as set forth below; or (iv) the next business day after the
same have been deposited with a national overnight delivery service
reasonably approved by the parties (Federal Express and DHL WorldWide
Express being deemed approved by the parties), postage prepaid, addressed
to the parties as set forth below with next-business-day delivery
guaranteed, provided that the sending party receives a confirmation of
delivery from the delivery service provider.
If to Licensor:
Celerity Solutions, Inc.
270 Bridge Street
Suite 301
Dedham, MA 02026
Attention: Chief Executive Officer
FAX (781) 329-1655
If to Licensee:
Paul Carr
2 Monadnock Road
Wellesley, MA 02181
Each party shall make an ordinary, good faith effort to ensure that it will
accept or receive notices that are given in accordance with this Section,
and that any person to be given notice actually receives such notice. A
party may change or supplement the addresses given above, or designate
additional addresses, for purposes of this Section by giving the other
party written notice of the new address in the manner set forth above.
11.8 Relationship of Parties. Each party acknowledges that it is an
independent entity and is not subject to the control of the other party in
any manner except as otherwise expressly provided herein. Nothing contained
herein shall be construed to constitute the parties as partners or joint
venturers, or to render either party liable for any of the debts or
obligations of the other party. Neither party has any authority to bind the
other party in any manner whatsoever except as otherwise expressly provided
herein.
11.9 Counterparts. This Agreement may be executed in two (2) or more
counterparts, each of which shall be deemed an original but all of which
taken together shall constitute but one and the same instrument.
11.10 Successors and Assigns. This Agreement shall inure to the
benefit of and be binding upon the parties hereto and their respective
heirs, representatives, successors and assigns.
[THE SIGNATURES HERETO APPEAR ON THE FOLLOWING PAGE.]
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Source License
Agreement.
CELERITY SOLUTIONS, INC.
By: /s/Paul Carr
---------------------------
Its: President
PAUL CARR
By: /s/ Paul Carr
---------------------------
<PAGE>
EXHIBIT A
DESCRIPTION OF SUPPLY CHAIN PLANNER SOFTWARE
The SCP software is all of the C, C++, and Visual Basic software related to
Supply Chain Planning, Supply Chain Monitoring, Transportation Planning and Load
Building. that Celerity obtained through the acquisition of Client Server
Technologies Inc., on March 31, 1997, plus all of the subsequent versions which
have been developed from the date of that acquisition through the date of this
Agreement. Without limiting the generality of the foregoing, the SCP Software is
further defined, without any limitation, as a system that (a) receives messages
for supply, demand, forecast and inventory balances, (b) contains a model for
resupplying items and locations, (c) maintains a schedule of planned order for
each product and location, (d) performs bill-of-material explosions and plans
resultant material requirements, (e) monitors supply and demand and generates
appropriate exception notices on request, (e) provides the ability to establish
multiple planning databases called planning domains and allows the user to link
supply and demand across domains, (f) provides transportation planning and load
building facilities, (g) provides the ability to browse and page through graphs
projecting inventory availability for multiple products at multiple locations.
Capitalized terms which are used in this Description of the Supply Chain
Planner Software and which are not otherwise defined herein shall have the
meaning given to them in the Agreement.
<PAGE>
EXHIBIT B
THIRD PARTY TOOLS
<TABLE>
<CAPTION>
Tool Name Tool Description Purpose
<S> <C> <C>
Oracle 7.3.x Relational Database Continuum Server Database
Personal Oracle 7.3.x Relational Database for Laptop Server Database for demos on Laptop
Microsoft Visual C++ Programming language WMS RF
Pro-C Compiler 2.2.4 Pre Compiler for C Pre-compile SQL based C code into C code
MS Visual Source Safe Version Control Version Control
PL/SQL Oracle Debugger Oracle PL/SQL Debugger Debugging PL/SQL code running on the
server
Doc to Help Online Help documentation Tool Creation of online documentation for
help screen integrated into the
application
Micro Focus COBOL Programming language Development of the Micro Focus based
products
</TABLE>
CELERITY SOLUTIONS, INC.
EXHIBIT 21.1
List of Capitol Multimedia, Inc. Subsidiaries
Name of Subsidiary State of Jurisdiction of Incorporation
- ------------------ --------------------------------------
Animation Magic, Inc. Delaware
Client Server Technologies, Inc. Massachusetts
"Paragon" LLC St. Petersburg, Russia
Somerset Solutions, Inc Delaware
CELERITY SOLUTIONS, INC.
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement Form
S-8 pertaining to the 1991 Non-Qualified Employee Stock Option Plan and the 1992
Non-Qualified, Non-Employee Director Stock Option Plan of Celerity Solutions,
Inc. of our report dated June 11, 1999 except for note 16, as to which the date
is July 13, 1999, with respect to the consolidated financial statements of
Celerity Solutions, Inc. included in the Annual Report (Form 10-KSB) for the
year ended March 31, 1999.
Our audits also included the financial statement schedule of Celerity Solutions
Inc. listed in Item 13(a). This schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits. In
our opinion, the financial statement schedule referred to above, when considered
in relation to the consolidated financial statements taken as a whole, presents
fairly in all material respects the information set forth herein.
/s/ ERNST & YOUNG LLP
Boston, Massachusetts
July 13, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE CONSOLIDATED
BALANCE SHEET AT MARCH 31, 1999 AND THE CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED MARCH 31, 1999 FOUND ON PAGES 27 TO 29 OF THE COMPANY'S FORM
10KSB AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<CIK> 0000884142
<NAME> CELERITY SOLUTIONS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 401,376
<SECURITIES> 13,251
<RECEIVABLES> 3,004,327
<ALLOWANCES> 230,000
<INVENTORY> 0
<CURRENT-ASSETS> 3,468,381
<PP&E> 1,593,133
<DEPRECIATION> 970,149
<TOTAL-ASSETS> 5,956,362
<CURRENT-LIABILITIES> 3,621,549
<BONDS> 0
0
0
<COMMON> 959,289
<OTHER-SE> 293,166
<TOTAL-LIABILITY-AND-EQUITY> 5,956,362
<SALES> 11,466,383
<TOTAL-REVENUES> 11,466,383
<CGS> 6,922,756
<TOTAL-COSTS> 6,922,756
<OTHER-EXPENSES> 7,854,018
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 218,361
<INCOME-PRETAX> (3,414,067)
<INCOME-TAX> (523,178)
<INCOME-CONTINUING> (2,890,889)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,890,889)
<EPS-BASIC> (.36)
<EPS-DILUTED> (.36)
</TABLE>
