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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-26390
CELERIS CORPORATION
(Exact name of registrant as specified in its charter)
MINNESOTA 41-1545493
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1801 WEST END AVENUE, SUITE 750
NASHVILLE, TENNESSEE 37203
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (615) 341-0223
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE
(Title of Class)
Indicate by check mark whether registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding twelve 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 ( )
The aggregate market value of the common stock held by non-affiliates
of the registrant at March 15, 2000 was $13.4 million based on the last sale
price for the Common Stock as quoted on the Nasdaq National Market on that date.
As of March 15, 2000 there were 3,129,437 shares of the registrant's
common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE: Pursuant to General Instruction
G(2), the responses to Items 6, 7, and 8 of Part II of this report are
incorporated herein by reference from the Company's Annual Report to
Shareholders for the year ended December 31, 1999. Pursuant to General
Instruction G(3), the responses to Items 10, 11 and 12 of Part III of this
report are incorporated herein by reference from the Company's definitive proxy
statement for its 2000 Annual Meeting of Shareholders to be filed with the
Securities and Exchange Commission on or before March 22, 2000.
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not 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-K or any
amendment to this Form 10-K. (X)
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PART I
ITEM 1. BUSINESS
OVERVIEW
Celeris Corporation ("Celeris" or the "Company") is a provider of specialty
clinical research and information technology services that expedite and
streamline the clinical trial and regulatory submission process for
pharmaceutical, medical device and biotechnology manufacturers. These services
accelerate specific functions within clinical trials and new product submissions
which often become bottlenecks for manufacturers seeking regulatory clearance to
market new products. Delays in obtaining regulatory clearance for new products
can result in significant lost revenues and increased expenses for
manufacturers. As a consequence, manufacturers have increasingly outsourced
clinical research functions to organizations, such as the Company, that can
offer expertise and services which speed the product development process.
CLINICAL RESEARCH OUTSOURCING AND INDUSTRY TRENDS
New pharmaceutical, medical device and biotechnology products undergo extensive
clinical testing and regulatory review to determine their safety and efficacy.
Manufacturers seeking approval for these products are often responsible for
performing and analyzing pre-clinical and multi-phase clinical trials.
Historically, manufacturers primarily used in-house personnel to conduct these
trials. In recent years, manufacturers have begun to outsource clinical trials
to clinical research organizations ("CROs"). Outsourcing of clinical research
has been done for a variety of reasons: (i) cost containment efforts have lead
companies to seek ways to reduce overhead, turning fixed costs into variable
costs; (ii) the increasingly complex nature and size of research trials requires
greater expertise, which may not be found in-house; (iii) the need to reduce the
time it takes to get a product through the Food and Drug Administration ("FDA")
approval process; and (iv) the growth of smaller niche companies, particularly
in the biotechnology and medical device industries, which lack internal
resources to complete the approval process.
Worldwide spending for research and development ("R&D") outsourcing is
projected at $28.3 billion, $5.6 billion of which is projected to be outsourced
to CROs. R&D outsourcing to CROs has grown at a rate of 20% annually over the
last five years. The Company believes this trend will continue as manufacturers
strive to enhance their revenues through faster product development while
containing their costs. The CRO industry assists companies in this regard by
providing a higher level of expertise or specialization than would be available
in-house, capability to perform product development activities more quickly, and
the opportunity to convert the fixed costs required to maintain in-house
resources into variable costs through outsourcing.
In recent years, a number of CROs have emerged as large, full service providers
of a broad range of product development services on a global basis. Their
strategy is to provide a turnkey approach to meet the product development needs
of manufacturers. These organizations typically maintain offices in multiple
countries and employ hundreds or even thousands of individuals. Many of the
large CROs have sustained significant growth rates over the past several years,
produced either by internal expansion, strategic acquisitions of other
organizations that provided geographic expansion, new therapeutic expertise, or
broader service capabilities, or by a combination thereof. While successful, the
larger CROs may not meet the needs of some pharmaceutical, biotechnology and
medical device manufacturers for a variety of reasons, including a preference on
the part of some manufacturers to work with smaller, more client-focused
organizations.
This unfulfilled need has contributed to the emergence of smaller niche
providers, who are focused on providing specific services within the product
development process, or who specialize in one or more therapeutic areas.
Services provided by these organizations, including those provided by the
Company, may be utilized by product development organizations directly or by
other CROs. These organizations range in size from a few hundred employees to
sole proprietorships. Overall, the CRO industry is highly fragmented with
several hundred CROs in existence.
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BUSINESS STRATEGY
The Company's overall strategy is to offer select clinical research and
information technology services to pharmaceutical, medical device and
biotechnology manufacturers in areas that accelerate the product development
process. In its service areas, the Company focuses on services that expedite and
streamline clinical trials and regulatory submissions for new drugs, devices and
other regulated healthcare products. The Company offers its services either on a
stand-alone basis or as part of clinical study management program.
SERVICES
Clinical Monitoring Staffing Services. The clinical research process requires
highly trained, experienced individuals. The CRO industry's rapid growth over
recent years has made for a very competitive environment regarding the hiring,
training and retention of employees which has, in many cases, resulted in a high
employee turnover rate throughout the industry. Throughout the life of a
clinical study, significant employee turnover can dramatically impact data
quality and FDA submission timelines, resulting in increased costs. To assist
product development organizations and CROs in identifying qualified resources,
the Company provides experienced clinical monitors on a contract basis to both
product development organizations and to CROs. These individuals possess a
number of years experience monitoring trials in multiple therapeutic areas,
strong interpersonal skills, and a demonstrated ability to work independently.
Data Management. Clinical trials produce large amounts of data that must be
properly collected and analyzed. This process can be inefficient, particularly
when it involves the use of antiquated systems or the merging of large data sets
housed on disparate systems. To address these issues, the Company has invested
in a state-of-the-art database management system that will allow for the
efficient replication and upload of sponsor data sets. The Company believes use
of the system provides a competitive advantage as a number of product
development companies use the same database system. In addition, the Company is
also experienced in the collection and integration of disparate data sets. As
the size and complexity of clinical trials grows, data sets within a particular
protocol or set of protocols may be generated using different systems making it
cumbersome to analyze and compare study results. The Company's experience in
this area allows it to assist clients in the efficient integration of data sets
suitable for statistical analysis and submission to regulatory authorities. The
Company believes the demand for data integration will continue to grow due in
part to the growth in new product development, coupled with increased licensing
activity and joint ventures between product development organizations.
Regulatory Consulting. Through its subsidiary, C.L. McIntosh & Associates
("CLMA"), Celeris provides regulatory consulting services, primarily to medical
device and biologic manufacturers. The Company assists manufacturers in
obtaining and maintaining FDA clearance to market their products and to comply
with all applicable FDA regulations. There are four consulting groups within
CLMA as described below.
Medical Device Evaluation. The Medical Device Evaluation Group provides
medical device manufacturers with strategic planning, preparation and
review services related to various FDA submissions, such as
Investigational Device Exemptions ("IDEs"), Premarket Notifications
("510(k)s"), and Premarket Approval Applications ("PMAs") for clearance
to market new medical products. In doing so, this group may prepare the
entire regulatory submission or individual sections, or review the
client's submission for potential FDA issues and completeness.
Additionally, the group will represent and advise clients in meetings
with FDA reviewers and advisory panels.
Statistics. The Statistics Group provides comprehensive statistical
consulting related to clinical study design and protocol development,
database design, programming and validation, data analysis and report
preparation. This group also assists clients in their interactions
with and presentations to the FDA.
Quality Systems and Compliance. The Quality Systems and Compliance
Group provides consulting services to clients with medical device and
radiation-emitting electronic products regarding GMP (Good
Manufacturing Practices) and QSR (Quality System Regulations). This
group also consults on issues related to electronic product radiation
safety performance standards, product certification processes, recalls,
responses to FDA inspections, complaint handling systems and other
record-keeping and reporting requirements.
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Biologics. The Biologics Group provides regulatory and product
development strategy, submission preparation and review, FDA
interaction, and clinical trial design to companies which produce
biologic markers and assays, blood and blood-related products, biologic
therapeutic agents (recombinant proteins from cell culture and from
transgenic sources), monoclonal antibodies, classical and
biotech-derived vaccines, and cell and gene therapies.
SALES AND MARKETING, CUSTOMERS AND COMPETITION
Sales and Marketing. The Company has a business development team focused on
selling services to pharmaceutical, medical device and biotechnology
manufacturers who have a track record of outsourcing clinical research services
and who the Company believes can benefit from its particular services. New
client leads are generated primarily through industry contacts, as well as
through participation in medical industry seminars and exhibits, direct mail and
advertising campaigns. The Company works to generate repeat business primarily
by providing quality services to its clients. Marketing of the Company's
regulatory consulting services is focused primarily on medical device and
biologics manufacturers located in the United States and focuses on the previous
FDA and industry experience of its senior consultants.
Customers. To date, the Company has served over 600 pharmaceutical, medical
device and biotechnology manufacturers, predominantly all of whom are in the
United States. The Company works with various client personnel including medical
and scientific personnel, regulatory affairs professionals, and business
executives. The Company has clients in a broad array of medical specialties,
with a strong presence in the cardiovascular, ophthalmology, biologic markers,
HIV and anti-infectives. During 1999, revenues from Roche Molecular and
BioCompatibles, Inc. accounted for 24.0% and 14.8%, respectively, of the
Company's consolidated revenues. The Company anticipates that in the future,
these clients or other clients may account for greater than ten percent of its
consolidated revenues, depending on the product development plans for each
client, each client's continued use of outsourced clinical research services and
the Company's ability to retain each client's business.
Competition. The Company competes in a large and highly fragmented industry
which consists of a broad array of companies ranging from large, publicly traded
organizations to sole proprietorships. The Company primarily competes against
in-house research and development departments of product development
manufacturers and other CROs, some of which possess substantially greater
capital, technical and other resources than the Company. CROs can possess
various competitive advantages, including previous client experience, expertise
in particular services or therapeutic areas, the quality of services performed,
financial viability and price.
GOVERNMENT REGULATION
The clinical investigation of new pharmaceutical, biotechnology and medical
device products is highly regulated by governmental agencies. The purpose of
United States federal regulations is to ensure that only those products which
have been proven to be safe and effective are made available to the public. The
FDA has set forth regulations and guidelines that pertain to virtually all
aspects of the product approval process. Pursuant to FDA regulations, CROs that
assume obligations of a company sponsor are required to comply with applicable
FDA regulations and are subject to regulatory action for failure to comply with
such regulations. In the United States, the historical trend has been in the
direction of increased regulation by the FDA.
The services provided by the Company are ultimately subject to FDA regulation in
the United States and comparable agencies in other countries, although the level
of applicable regulation in other countries is generally less comprehensive than
regulation present in the United States. The Company and its clients are
obligated to comply with FDA regulations governing all activities related to the
clinical trial process. The Company must also maintain records for each study
for specified periods for inspection by the study sponsor and the FDA during
audits. If such audits document that the Company has failed to adequately comply
with Federal regulations and guidelines, it could have a material adverse effect
on the Company. In addition, the Company's failure to comply with applicable
regulations could possibly result in termination of ongoing research or the
disqualification of data, either of which could also have a material adverse
effect on the Company, including, without limitation, damage to the Company's
reputation.
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EMPLOYEES
As of February 29, 2000, the Company had 109 full-time employees. The Company's
performance depends on its ability to attract, develop, motivate and retain
qualified professional, scientific and technical staff. There is significant
competition for employees with the skills required to perform the services
offered by the Company from other CROs as well as from the in-house research
departments of pharmaceutical, medical device and biotechnology companies. The
Company's employees are not covered by collective bargaining agreements. The
Company has experienced no work stoppages and believes its relations with its
employees to be good.
DISCONTINUED OPERATIONS
On June 10, 1998, the Company announced its intent to transition out of the
healthcare provider software market and focus its resources on its clinical
research services segment. On December 24, 1998, the Company completed the sale
of the healthcare provider software segment. See the information set forth under
the caption "Management's Discussion and Analysis" in the Company's Annual
Report to Shareholders for the year ended December 31, 1999 for further
discussion of discontinued operations.
CAUTIONARY STATEMENT AND RISK FACTORS
This Annual Report on Form 10-K contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. These
forward-looking statements include statements regarding intent, belief, or
current expectations of the Company and its management related to the business,
financial condition, liquidity, results of operations or prospects of the
Company. Such forward-looking statements are not guarantees of future
performance and involve risks and uncertainties that may cause the Company's
actual results to differ materially from the results expressed or implied by the
forward-looking statements. The risk factors set forth below, among others, in
the context of a forward-looking statement means that any one of the factors may
cause actual results to differ materially from those implied by such
forward-looking statements. These risk factors are in addition to any other
cautionary statements, written or oral, which may be made or referred to in
connection with any such forward-looking statement.
The Company May Continue to Incur Net Losses
The Company has incurred substantial net losses since its formation. Net losses
for the year ended December 31, 1999 were $2.11 million, and the accumulated
deficit at that date was $57.53 million. The Company's ability to increase
revenue will depend on a number of factors, including expanding its regulatory
and clinical studies consulting services and developing its new models for
clinical research services. The Company also anticipates increased operating
expenses for personnel to expand services. As a result, the Company expects that
it will continue to experience operating losses through 2000. The Company's
ability to achieve profitability and positive cash flow in future periods will
depend on its ability to control costs and to keep increases in expenditures
below growth in revenue, if any. The Company cannot predict whether it will
generate sufficient revenues, or adequately control costs, to achieve
profitability or positive cash flow.
The Company Will Experience Fluctuations in Quarterly Operating Results
The Company's quarterly operating results may fluctuate significantly because of
several factors, including the commencement or completion of significant
contracts, delays in implementing or completing particular clinical trials and
terminations of clinical trials. Due to the relatively fixed nature of most
costs, including personnel and facilities costs, any unanticipated shortfall in
revenue in any fiscal quarter would have an adverse effect on the results of
operations in that quarter. In general, quarterly revenue is difficult to
forecast because many of the Company's services have been recently introduced,
which makes forecasting demand for, and revenue from, these services uncertain.
As a result of the foregoing factors, it is possible that in some future
quarters results of operations will be below the expectations of public market
analysts and investors. In such event, the price of the Company's common stock
could be adversely affected.
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The Company Depends on Certain Industries
The Company's revenue is highly dependent upon the research and development
expenditures of the pharmaceutical, medical device and biotechnology industries
and the use of outside clinical research services by these industries. The
Company's operations could be materially and adversely affected by a general
economic decline in these industries or by any reduction in their research and
development expenditures or in the outsourcing of clinical research services.
The Company Operates in a Highly Competitive Industry
The market for clinical research services offered by the Company is highly
competitive. The Company competes against traditional clinical research
organizations, the in-house research and development departments of sponsor
companies, as well as universities and teaching hospitals. Most of these
competitors have established market positions and greater capital, technical and
other resources than the Company. Increased competition may lead to price and
other forms of competition that may affect margins.
Large Contracts May Be Terminated or Delayed
Most of the Company's contracts are terminable by the client. Clients may
terminate, delay or change the scope of contracts for a variety of reasons,
including, among others, the failure of products being tested to satisfy safety
requirements, unexpected or undesired clinical results of the product, the
client's decision to forego a particular study, such as for economic reasons,
insufficient patient enrollment or investigator recruitment or production
problems resulting in shortages of the product being tested. In addition, the
Company believes that cost-containment and competitive pressures have caused
sponsor companies to apply more stringent criteria to the decision to proceed
with clinical trials and, therefore, may result in a greater willingness of
these companies to cancel contracts with clinical research organizations. The
loss, delay or change in scope of a large contract or multiple contracts could
have a material adverse effect on the Company's financial performance.
Backlog May Not be a Meaningful Indicator of Future Revenue
The Company periodically reports backlog of potential revenue yet to be earned
from projects under contracts or letters of intent. Contracts included in
backlog may be terminated, delayed or revised in scope by clients for a variety
of reasons. At December 31, 1999, backlog was $5.8 million. The Company believes
that its backlog as of any given date may not necessarily be a meaningful
predictor of future results and no assurances can be given that the Company will
be able to realize fully all of its backlog as revenue.
Dependence on a Single Client for a Significant Portion of Revenue
The Company has in the past, and may in the future, derive a significant portion
of its revenue from a single client. In 1999, the Company derived 24.0% and
14.8% of its revenue from Roche Molecular and BioCompatibles, Inc.,
respectively. In 1998, the Company derived 13.2% and 10.7% of its revenue from
Mentor Corporation and Guidant Corporation, respectively. The loss of, or
significant decrease in business from, a single client or clients may have a
material adverse effect on the Company.
The Company May Experience Operational Difficulties
Expansion in the clinical research services market will place a strain on
operational, human and financial resources. In order to manage such expansion,
the Company must continue to improve operating, administrative and information
systems, accurately predict future personnel and resource needs to meet client
contract commitments, track the progress of ongoing client projects, and attract
and retain qualified management, professional, scientific and technical
operating personnel. Failure to meet the demands of the expansion of the
business could have a material adverse effect on the Company.
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The Company Depends on Government Regulation
The clinical research industry depends on the comprehensive government
regulation of the product development process. In the United States, the general
trend has been in the direction of continued or increased regulation. Changes in
regulation, including a relaxation in regulatory requirements or the
introduction of simplified approval procedures, could materially and adversely
impact the demand for the services offered by the Company. In addition, failure
to comply with applicable regulations could result in the termination of ongoing
research or the disqualification of data, either of which could have a material
adverse effect on the Company.
The Possibility of Material Adverse Outcomes Related to the Company's
Shareholder Lawsuits or SEC Investigation
As described fully in Item 3 of this Form 10-K, the Company is a defendant in IN
RE SUMMIT MEDICAL SYSTEMS, INC. SECURITIES LITIGATION, a consolidated federal
court securities action which was filed on March 10, 1997, and in TEACHERS'
RETIREMENT SYSTEM OF LOUISIANA V. SUMMIT MEDICAL SYSTEMS, INC. ET. AL. which was
filed on April 16, 1997 and is not a class action. Each action alleges, in
essence, that the Company made misleading public disclosures relating to its
financial statements and seeks compensatory damages for losses incurred as a
result of each alleged misleading public disclosure. The actions do not state
the monetary damages that are being sought at this time. The Company intends to
defend against these actions vigorously. There can be no assurance that any
judgement, order or decree against the Company arising out of these actions will
not have a material adverse effect on the Company or its business.
The Division of Enforcement of the Securities and Exchange Commission (the
"SEC") is conducting an investigation relating to the Company's restatement of
certain financial statements in 1997. The Company is cooperating fully with the
SEC and its investigation. The Company cannot predict whether any order, decree
or other action issued or taken by the SEC arising out of its investigation will
not result in sanctions which could have a material adverse effect on the
Company or certain individuals.
The Company May Not Have Directors' and Officers' Insurance Coverage for
Litigation Liabilities
As described fully in Item 3 of this Form 10-K, the insurance underwriters of
the Company's former directors' and officers' insurance policies have sought to
deny coverage for costs and liabilities related to the pending shareholder
litigation and SEC investigation. The insurance underwriters filed a declaratory
relief action seeking to affirm this denial to which the Company is opposed and
filed a counterclaim to enforce coverage under this policy. The judge in the
case ruled in favor of the Company's counterclaim and held that the directors'
and officers' insurance policies cover the costs and liabilities related to the
pending shareholder litigation and SEC investigation. The insurance underwriters
have appealed the judge's decision which the Company has opposed. If the
insurance underwriters are successful in this appeal, the insurance underwriters
will not be responsible for any potential losses resulting from an adverse
judgement on, or settlement of, the shareholder litigation, or for the Company's
expenses related to the defense of directors and officers in connection with
this litigation, which could have a material adverse effect on the Company.
The Company May Experience Different Results Than Expected Related to
Discontinued Operations
The Company has retained certain liabilities related to the discontinued
operations. Failure of assumptions related to the estimated remaining liability
amounts of the discontinued operations could have a material adverse effect on
the Company.
ITEM 2. PROPERTIES
The Company leases approximately 13,000 square feet for its corporate
headquarters in Nashville, Tennessee; approximately 15,500 square feet for its
office in Rockville, Maryland; and approximately 16,000 square feet for its
office in Morrisville, North Carolina. The Company believes that the space
leased is adequate for the Company's operations and that the leases generally
reflect market rates in their respective geographic locations. The expiration
dates of the leases range from 2001 to 2003.
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ITEM 3. LEGAL PROCEEDINGS
The Company is a defendant in IN RE SUMMIT MEDICAL SYSTEMS, INC. SECURITIES
LITIGATION ("Securities litigation"), a consolidated federal court securities
action venued in the United States District Court, District of Minnesota. The
putative class action was filed on March 10, 1997 and alleges violations of
Section 10(b) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act") and Rule 10b-5, Section 20(a) of the Exchange Act, Section 11 of the
Securities Act of 1933, as amended (the "Securities Act"), and Section 15 of the
Securities Act. The Company is also a defendant in a federal court securities
action captioned TEACHERS' RETIREMENT SYSTEM OF LOUISIANA V. SUMMIT MEDICAL
SYSTEMS, INC. ET. AL. The Teachers' Retirement action was filed on April 16,
1997 in the United States District Court, District of Minnesota and is not a
class action. In addition to the claims alleged in the consolidated action, the
Teachers' Retirement complaint alleges a claim under Section 18(a) of the
Exchange Act, common law fraud, and negligent misrepresentation. Each action
alleges, in essence, that the Company made misleading public disclosures
relating to its financial statements and seeks compensatory damages for losses
incurred as a result of each alleged misleading public disclosure. As to federal
securities law claims, both actions are subject to the Private Securities
Litigation Reform Act of 1995 (the "Reform Act"). The actions do not state the
monetary damages that are being sought at this time. The Company intends to
defend against these actions vigorously. There can be no assurance that any
judgement, order or decree against the Company arising out of these actions will
not have a material adverse effect on the Company or its business.
The Division of Enforcement of the Securities and Exchange Commission (the
"SEC") is conducting an investigation of the Company, relating to the Company's
restatement of certain financial statements. The Company is cooperating fully
with the SEC and its investigation. There can be no assurance that any order,
decree or other action issued or taken by the SEC arising out of its
investigation will not result in sanctions against the Company or certain
individuals that could have a material adverse effect on the Company or its
business.
The Company and certain of the Company's directors and former officers are
defendants in a declaratory relief action, DAVID FOSTER ET. AL. V. SUMMIT
MEDICAL SYSTEMS, INC. ET. AL., venued in the District Court of Hennepin County,
Minnesota. The action was initiated on August 7, 1998 and seeks a declaration
that there is no coverage under the Company's directors' and officers' insurance
policies for the Company's pending Securities litigation or the investigation by
the Commission. The plaintiffs, the insurance underwriters of the Company's
directors' and officers' insurance policies, allege that the claims the Company
has submitted for coverage involve matters commenced before the period covered
by the policies. Additionally, the plaintiffs allege that the Commission's
investigation does not constitute a proper claim under the policies. The Company
believes the plaintiffs' request for declaratory judgment misinterprets the
Company's directors' and officers' insurance policy. On July 22, 1999, the
District Court ruled in favor of the Company's motion for summary judgment and
held that the Company's directors' and officers' insurance policies cover claims
related to the Company's Securities litigation. On October 6, 1999, the
insurance underwriters filed a notice of appeal of the District Court's order
with the Minnesota Court of Appeals. The Company intends to respond to this
appeal vigorously. There can be no assurance that any order, decree or
declaration arising out of this matter will not have a material adverse effect
on the Company or its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS
MATTERS
The Company's Common Stock trades on The Nasdaq Stock Market(R) ("Nasdaq") under
the symbol "CRSC". On March 15, 2000 the last reported sale price for the Common
Stock on Nasdaq was $5.06. As of March 15, 2000 the Company had 167 holders of
record of the Common Stock and the Company estimates an additional 1,475
beneficial owners. The following table shows the high and low sales prices for
the Common Stock as reported by Nasdaq for the periods indicated (adjusted to
reflect the one for three reverse stock split).
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1998
First quarter $ 10.69 $ 4.31
Second quarter $ 15.38 $ 6.19
Third quarter $ 8.63 $ 3.00
Fourth quarter $ 4.50 $ 1.88
1999
First quarter $ 4.13 $ 2.25
Second quarter $ 3.75 $ 1.69
Third quarter $ 4.03 $ 1.13
Fourth quarter $ 2.38 $ 0.94
</TABLE>
The Company has paid no dividends since its inception date.
On November 9, 1999, the Company announced that it was not in compliance with
the Nasdaq National Market's continued listing requirement that the market value
of the Company's public float exceed $5 million. Nasdaq informed the Company
that unless it regained compliance with the public float requirement by January
7, 2000, and maintained compliance with the other Nasdaq continued listing
requirements, the Company's Common Stock would be delisted. The Company
requested an oral hearing before a Nasdaq Listing Qualifications Panel, which
was granted February 17, 2000. On March 6, 2000, the Company received a letter
from Nasdaq stating that as of the close of business on March 3, 2000, the
Company had reported a market value of public float of at least $5 million for
twenty (20) consecutive trading days and had therefore evidenced compliance with
all requirements necessary for continued listing on the Nasdaq National Market.
ITEM 6. SELECTED FINANCIAL DATA
The information set forth under the caption "Selected Financial Data" in the
Company's Annual Report to Shareholders for the year ended December 31, 1999 is
incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information set forth under the caption "Management's Discussion and
Analysis" in the Company's Annual Report to Shareholders for the year ended
December 31, 1999 is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company has no derivative financial instruments or derivative commodity
instruments in its cash and cash equivalents and short-term investments. The
Company invests its cash and cash equivalents and short-term investments in
investment grade, highly liquid investments, consisting of money market
instruments and U.S. agency bonds and does not believe these investments are
subject to material market risks. In addition, all of the Company's transactions
are conducted and accounts are denominated in U.S. dollars. Accordingly, the
Company is not exposed to foreign currency risks.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and related supplementary data of the Company as of and
for the year ended December 31, 1999 on page 11 through page 26 of the Company's
Annual Report to Shareholders for the year ended December 31, 1999 are
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning this Item is incorporated herein by reference to the
Company's definitive proxy materials for the Company's 2000 Annual Meeting of
Shareholders.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning this Item is incorporated herein by reference to the
Company's definitive proxy materials for the Company's 2000 Annual Meeting of
Shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning this Item is incorporated herein by reference to the
Company's definitive proxy materials for the Company's 2000 Annual Meeting of
Shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) Financial Statements of the Company and its subsidiaries required
to be included in Part II, Item 8 are incorporated herein by reference
from the Company's Annual Report to Shareholders for the year ended
December 31, 1999, and are included in Exhibit 13.
(a) (2) and (d) Report of Independent Public Accountants and Schedule II -
Valuation and Qualifying Accounts are located on pages S-1 and S-2,
respectively, of this Annual Report on Form 10-k.
(a) (3) and (c) Exhibits.
EXHIBIT NO. DESCRIPTION
*3.1 Restated Articles of Incorporation of the Company, as amended
******3.2 Amendment to Articles of Incorporation of the Company for name change
*3.3 Bylaws of the Company
9
<PAGE> 11
******4.1 Form of Certificate for Common Stock
*10.1 Summit Medical Systems, Inc. 1993 Stock Option Plan
*10.2 Summit Medical Systems, Inc. 1995 Non-Employee Director Stock Option
Plan
**10.3 First and Second Amendment to Summit Medical Systems, Inc., 1993
Stock Option Plan
***10.4 Employment Agreement between Summit Medical Systems, Inc., C. L.
McIntosh & Associates, Inc. and Charles L. McIntosh dated December
31, 1996
***10.5 Employment Agreement between Summit Medical Systems, Inc. and Donald
F. Fortin dated December 31, 1996
****10.6 Third Amendment to Summit Medical Systems, Inc., 1993 Stock Option
Plan
****10.7 Fourth Amendment to Summit Medical Systems, Inc., 1993 Stock Option
Plan
****10.8 Employment Agreement dated October 6, 1997 between Summit Medical
Systems, Inc. and Barbara A. Cannon
*****10.9 Asset Purchase Agreement, dated November 25, 1998, between Velos
Medical Informatics, Inc. and Summit Medical Systems, Inc.
13 Portions of the Company's Annual Report to Shareholders for the year
ended December 31, 1999
23.1 Consent of Arthur Andersen LLP
27.1 Financial Data Schedule (for SEC use only) - Year Ended December 31,
1999
- ---------------
* Incorporated by reference to the Company's Registration Statement on
Form S-1 (File No. 33-93700).
** Incorporated by reference to the Company's Current Report on Form 8-K
filed January 14, 1997 (File No. 0-26390).
*** Incorporated by reference to the Company's Annual Report on Form
10-K/A for the year ended December 31, 1996 (File No. 0-26390).
**** Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1997 (File No. 0-26390)
***** Incorporated by reference to the Company's Current Report on Form 8-K
dated January 8, 1999 (File No. 0-26390)
****** Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1998
(b) No reports on Form 8-K were filed during the quarter ended December
31, 1999.
10
<PAGE> 12
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: March 23, 2000 CELERIS CORPORATION
By /S/ BARBARA A. CANNON
---------------------------------------
BARBARA A. CANNON
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the registrant
and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/S/ JOHN M. NEHRA Chairman of the Board March 23, 2000
- -------------------------------------
JOHN M. NEHRA
/S/ BARBARA A. CANNON President and Chief Executive Officer March 23, 2000
- ------------------------------------- and Director (principal executive
BARBARA A. CANNON officer)
/S/ PAUL R. JOHNSON Vice President and Chief March 23, 2000
- ------------------------------------- Financial Officer and Secretary
PAUL R. JOHNSON (principal financial
and accounting officer)
/S/ W. HUDSON CONNERY, JR. Director March 23, 2000
- -------------------------------------
W. HUDSON CONNERY, JR.
/S/ RICHARD B. FONTAINE Director March 23, 2000
- -------------------------------------
RICHARD B. FONTAINE
/S/ PETER T. GARAHAN Director March 23, 2000
- -------------------------------------
PETER T. GARAHAN
/S/ ANDRE G. PERNET, PH.D. Director March 23, 2000
- -------------------------------------
ANDRE G. PERNET, PH.D
</TABLE>
11
<PAGE> 13
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Celeris Corporation:
We have audited in accordance with auditing standards generally accepted in the
United States, the consolidated financial statements included in Celeris
Corporations' Annual Report to Shareholders incorporated by reference in this
Form 10-K, and have issued our report thereon dated February 1, 2000. Our audit
was made for the purpose of forming an opinion on those consolidated statements
taken as a whole. The schedule listed in the index is the responsibility of the
Company's management and is presented for purposes of complying with the
Securities and Exchange Commission's rules and are not part of the basic
consolidated financial statements. This schedule has been subjected to the
auditing procedures applied in the audit of the basic consolidated financial
statements and, in our opinion, fairly states in all material respects the
financial data required to be set forth therein in relation to the basic
consolidated financial statements taken as a whole.
/s/ Arthur Andersen LLP
Nashville, Tennessee
February 1, 2000
S-1
<PAGE> 14
CELERIS CORPORATION AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
12/31/99 12/31/98 12/31/97
---------- ---------- --------
<S> <C> <C> <C>
Allowance for doubtful accounts (a):
Balance at beginning of period $ 171,756 $ 59,425 $ --
Additions:
Charged to costs and expenses 198,332 119,892 127,132
Charged to other accounts -- -- --
Deductions (b) 26,672 7,561 67,707
---------- ---------- --------
Balance at end of period $ 343,416 $ 171,756 $ 59,425
========== ========== ========
Net liabilities of discontinued operations:
Balance at beginning of period $4,256,332 $ -- $ --
Additions:
Charged to costs and expenses -- 5,874,000 --
Charged to other accounts -- -- --
Deductions 3,060,809 1,617,668 --
---------- ---------- --------
Balance at end of period $1,195,523 $4,256,332 $ --
========== ========== ========
</TABLE>
(a) Amounts related to allowance for doubtful accounts have been restated
for discontinued operations.
(b) Uncollectible accounts written off
S-2
<PAGE> 1
EXHIBIT 13
SELECTED FINANCIAL DATA
The consolidated statements of operations data set forth below for each of the
three years ended December 31, 1999, 1998 and 1997 and the consolidated balance
sheet data at December 31, 1999 and 1998 are derived from, and are qualified by
reference to, the audited consolidated financial statements included elsewhere
in this Annual Report. The consolidated statements of operations data for the
years ended December 31, 1996 and 1995 and the consolidated balance sheet data
at December 31, 1997, 1996 and 1995 are derived from audited consolidated
financial statements of the Company not included herein. The information set
forth below should be read in conjunction with "Management's Discussion and
Analysis," the Company's Consolidated Financial Statements and related Notes,
and other financial information included elsewhere herein. All prior period
amounts have been restated for discontinued operations.
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------------------------
1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------
(in thousands, except for per share amounts)
<S> <C> <C> <C> <C> <C>
Revenue $ 9,253 $ 5,783 $ 5,102 $ 3,671 $ 3,895
Cost of sales 6,312 4,028 3,424 2,100 2,077
---------------------------------------------------------------------
Gross profit 2,941 1,755 1,678 1,571 1,818
General and administrative expenses 7,508 5,068 2,767 2,390 1,707
---------------------------------------------------------------------
Loss from operations (4,567) (3,313) (1,089) (819) 111
Interest income, net 537 1,199 1,946 1,888 575
---------------------------------------------------------------------
Income (loss) from continuing operations (4,030) (2,114) 857 1,069 686
Discontinued operations:
Loss from discontinued operations -- (4,707) (19,902) (13,905) (9,710)
Gain (loss) on disposal of discontinued
operations 1,915 (5,832) -- -- --
---------------------------------------------------------------------
Total discontinued operations 1,915 (10,539) (19,902) (13,905) (9,710)
---------------------------------------------------------------------
Net loss $ (2,115) $(12,653) $(19,045) $(12,836) $ (9,024)
=====================================================================
Basic income (loss) per common share:
Continuing operations $ (1.29) $ (0.66) $ 0.25 $ 0.34 $ 0.31
Discontinued operations 0.61 (3.30) (5.82) (4.44) (4.47)
---------------------------------------------------------------------
$ (0.68) $ (3.96) $ (5.57) $ (4.10) $ (4.16)
=====================================================================
Diluted income (loss) per common share:
Continuing operations $ (1.29) $ (0.66) $ 0.24 $ 0.32 $ 0.29
Discontinued operations 0.61 (3.30) (5.52) (4.17) (4.12)
---------------------------------------------------------------------
$ (0.68) $ (3.96) $ (5.28) $ (3.85) $ (3.83)
Weighted average shares outstanding:
Basic 3,115 3,191 3,420 3,133 2,171
Diluted 3,115 3,191 3,604 3,339 2,356
Balance sheet data (end of period):
Cash, cash equivalents, restricted cash
and short-term investments $ 8,965 $ 15,222 $ 27,996 $ 44,630 $ 22,921
Working capital 8,628 11,192 24,226 41,707 24,276
Total assets 13,178 18,164 30,671 49,847 29,530
Long-term debt -- -- -- -- 8
Shareholders' equity 10,016 12,205 25,597 46,083 25,834
</TABLE>
6
<PAGE> 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion and analysis should be read in conjunction with the
Company's Consolidated Financial Statements and Notes thereto included in this
Annual Report. Except for the historical information contained herein, the
following discussion and analysis may contain forward-looking statements that
involve risks and uncertainties, such as statements of the Company's plans,
objectives, expectations and intentions. The cautionary statement made in Item 1
of the Company's Annual Report on Form 10-K should be read as being applicable
to all related forward-looking statements wherever they appear in this
discussion and analysis. The Company's results could differ materially from
those implied by the following discussion and analysis. Factors that could cause
or contribute to such differences include those discussed in Item 1 of the
Company's Annual Report on Form 10-K under the caption "Cautionary Statement and
Risk Factors," as well as other factors discussed elsewhere herein.
Overview
Celeris Corporation is a provider of specialty clinical research and information
technology services that expedite and streamline the clinical trial and
regulatory submission process for pharmaceutical, medical device and
biotechnology manufacturers.
On June 10, 1998, the Company announced its intent to transition out of the
healthcare provider software market and focus its resources on its clinical
research services segment. On December 24, 1998, the Company completed the sale
of its healthcare provider software segment. As consideration for the sale, the
Company agreed to a purchase price of up to $2,000,000, contingent upon the
performance of the assets and the buyer's costs to perform prepaid support and
service obligations after the closing. Based on the performance of the assets
through September 30, 1999, the Company determined that the purchase
price would be fixed at $1.5 million, of which $200,000 and $700,000 was
received in 1998 and 1999, respectively, and $600,000 was received January 31,
2000. In addition, the Company agreed to reimburse the buyer for the performance
of prepaid support and service obligations on assigned contracts in the amount
of $500,000, which was completed June 30, 1999. The Company has retained certain
liabilities related to the software segment including certain amounts due under
customer contracts and other liabilities related to the disposal of the segment.
The financial position and results of operations of the healthcare provider
software segment are reported as discontinued operations and all prior period
amounts have been restated to reflect the discontinued operations.
Effective January 29, 1999, the Company changed its name from Summit Medical
Systems, Inc. to Celeris Corporation.
On July 26, 1999, the Company's Board of Directors approved a one-for-three
reverse split of its common stock, applicable to shareholders of record at the
close of trading on July 29, 1999. The reverse split was intended, in part, to
address compliance for continued listing of the Company's common stock with the
Nasdaq Stock Market criteria, which requires a minimum bid price of $1.00 per
share. Income (loss) per share, common stock outstanding and stock option data
included herein have been adjusted retroactively to give effect to the reverse
split.
Calculated on a post split basis, the Company had approximately 3.1 million
shares of common stock outstanding as of December 31, 1999.
As of December 31, 1999, the Company had a backlog of projects for clinical
studies management, clinical monitoring staffing and data management services
with an aggregate contract value of approximately $5.8 million. Potential
7
<PAGE> 3
cancellation, delay or change in scope of projects may affect the value of the
Company's backlog.
The Company has experienced net losses for each of the past five years. Net
losses for the year ended December 31, 1999 were $2.11 million. The Company had
an accumulated deficit of $57.53 million as of December 31, 1999. The Company's
ability to increase revenue, and to achieve profitability and positive cash flow
will depend on a number of factors as summarized in Item 1 of the Company's
Annual Report on Form 10-K under the caption "Cautionary Statement and Risk
Factors."
Results of Operations
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
The Company incurred a net loss of $2.11 million, or $0.68 per diluted share,
for the year ended December 31, 1999 as compared to a net loss of $12.65
million, or $3.96 per diluted share, for the year earlier period. The 1999
results include a loss from continuing operations of $4.03 million, or $1.29 per
diluted share, and a gain from discontinued operations of $1.92 million, or
$0.61 per diluted share. The 1998 results include a loss from continuing
operations of $2.11 million, or $0.66 per diluted share, and a loss from
discontinued operations of $10.54 million, or $3.30 per diluted share.
Continuing operations. Revenue from continuing operations for the year ended
December 31, 1999 was $9.25 million compared to $5.78 million for the year
earlier period, an increase of 60.0%. This increase in revenue resulted
primarily from a higher volume of the new services introduced in 1998.
Cost of sales were $6.31 million for the 1999 period, or 68.2% of revenue,
compared to $4.03 million for the 1998 period, or 69.7% of revenue. This
decrease in cost of sales as a percentage of revenue is primarily the result of
increased utilization of client service personnel. Further improvement in cost
of sales as a percentage of revenue will be dependent upon keeping client
service personnel utilized as billable resources.
General and administrative expenses were $7.51 million, or 81.1% of revenue, for
the 1999 period compared to $5.07 million, or 87.6% of revenue, for the 1998
period. This decrease in general and administrative expenses as a percentage of
revenue is primarily due to a higher volume of business during 1999. Further
improvement in general and administrative expenses as a percentage of revenue
will be dependent upon higher volumes of business as the Company has in place
the infrastructure necessary to support expanded service offerings.
Interest income for the 1999 period was $537,000 compared to $1.20 million for
the 1998 period as the Company's cash and cash equivalents balance, including
restricted cash and short-term investments, decreased to $8.97 million at
December 31, 1999 from $15.22 million at December 31, 1998.
Discontinued operations. During the year ended December 31, 1999, the Company
recorded a gain on the disposal of discontinued operations of $1.92 million,
representing the receipt of $1.3 million related to the December 1998 sale of
the software business and a $615,000 decrease in estimated liabilities retained
after the sale. The Company incurred losses from the discontinued operations of
its healthcare provider software segment of $10.54 million for the 1998 period,
which included charges for disposal of discontinued operations of $5.35 million
recorded in the second quarter related to the decision to exit the healthcare
provider software market and $483,000 recorded in the fourth quarter related to
the sale of the assets of the software segment.
8
<PAGE> 4
The loss from discontinued operations of $4.71 million in the 1998 period
represents results of operations of the discontinued business segment through
June 30, 1998. Losses for the period July 1, 1998 to December 24, 1998 (the date
the assets of the discontinued segment were sold) were accrued in conjunction
with the $5.35 million charge discussed above.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
The Company incurred a net loss of $12.65 million, or $3.96 per diluted share,
for the year ended December 31, 1998 as compared to a net loss of $19.04
million, or $5.28 per diluted share, for the year earlier period. The 1998
results include a loss from continuing operations of $2.11 million, or $0.66 per
diluted share, and a loss from discontinued operations of $10.54 million, or
$3.30 per diluted share. The 1997 results include income from continuing
operations of $857,000 or $0.24 per diluted share, and a loss from discontinued
operations of $19.90 million, or $5.52 per diluted share.
Continuing operations. Revenue from continuing operations for the year ended
December 31, 1998 was $5.78 million compared to $5.10 million for the year
earlier period, an increase of 13.4%. This increase in revenue resulted
primarily from a higher volume of consulting services performed.
Cost of sales were $4.03 million for the 1998 period, or 69.7% of revenue,
compared to $3.42 million for the 1997 period, or 67.1% of revenue. The increase
in cost of sales as a percentage of revenue is primarily the result of the
addition of client service personnel related to the Company's expanded service
offerings throughout 1998.
General and administrative expenses were $5.07 million, or 87.6% of revenue, for
the 1998 period compared to $2.77 million, or 54.2% of revenue, for the 1997
period. This increase in general and administrative expenses as a percentage of
revenue is primarily due to the addition of salaries, benefits and other
overhead costs associated with the Company's expanded service offerings.
Interest income for the 1998 period was $1.20 million compared to $1.95 million
for the 1997 period as the Company's cash and cash equivalents balance,
including restricted cash and short-term investments, decreased to $15.22
million at December 31, 1998 from $28.0 million at December 31, 1997.
Discontinued operations. The Company incurred a loss from the discontinued
operations of its healthcare provider software segment of $10.54 million for the
1998 period compared to $19.90 million for the 1997 period. The 1997 period
included special charges of $10.05 million related to the Company's 1996 revenue
restatement and 1997 restructuring.
Liquidity and Capital Resources
The Company's cash and cash equivalents, including restricted cash and
short-term investments, totaled $8.97 million as of December 31, 1999, a
decrease of $6.25 million from December 31, 1998. This decrease was primarily
due to a) $4.12 million used in continuing operating activities, b) $1.12
million used in discontinued operations, c) $880,000 used for the purchase of
equipment and fixtures, principally computer and computer systems equipment, and
d) $130,000 used in transactions involving the Company's stock.
As of December 31, 1999, the Company had net working capital of $8.63 million,
compared to $11.19 million at December 31, 1998. This decrease resulted
primarily from net losses of $2.11 million incurred during the year ended
December 31, 1999. Management anticipates the Company will continue to
experience oper-
9
<PAGE> 5
ating losses into 2000, and as a result, it believes working capital will
continue to decline.
As of December 31, 1999, the Company had $1.77 million in accounts receivable,
net of bad debt allowance, compared to $1.52 million as of December 31, 1998.
The Company believes its current allowance of $343,000 for bad debts is
adequate. The Company's days sales outstanding in accounts receivable was 62
days at December 31, 1999 and 88 days at December 31, 1998. Days sales
outstanding in accounts receivable may fluctuate in future periods as the
Company's mix of business continues to evolve.
The Company sold its healthcare provider software business effective December
24, 1998 and has collected $1.5 million in related proceeds. Of the $700,000 due
December 31, 1999, the Company had received $100,000 by the due date and
received the remainder on January 31, 2000. Also related to the sale of the
software business, the Company has retained certain liabilities of $1.20 million
as of December 31, 1999, including certain amounts due under customer contracts
and other liabilities related to the disposal of the segment.
The Company's Board of Directors has authorized a stock repurchase program under
which up to 666,667 shares of the Company's common stock may be repurchased.
From inception of the stock repurchase program in August 1997 through December
31, 1999, the Company has repurchased 439,867 shares of common stock for
approximately $3.05 million. As of December 31, 1999, there were 3,119,646
shares of the Company's common stock issued and outstanding.
As of December 31, 1999, the Company had approximately $545,000 subject to
withdrawal restrictions as a condition of certain lease agreements for office
space and equipment. The amount of cash restricted under the lease agreements
decreases periodically over the term of the leases, which extend to December
2002.
The Company believes that continued expenditure of funds will be necessary to
support its future operations, and that cash and cash equivalents, including
restricted cash and short-term investments, of $8.97 million on hand at December
31, 1999 will be sufficient to fund its operations, capital requirements, and
expansion goals through 2000. However, there can be no assurances that the
Company will generate sufficient revenue, or adequately control costs, to
achieve profitability or positive cash flow for periods into and beyond 2000. If
the Company cannot achieve profitability or positive cash flow, or if its
contingencies result in material expenditures, the Company may require
additional external financing in the future. There can be no assurances that
such financing will be available on terms acceptable to the Company.
Year 2000 Issue. The Company expensed costs of approximately $185,000 in
conjunction with its Year 2000 readiness preparations, which is consistent with
prior expectations. The Company has not experienced any material disruptions as
a result of the Year 2000 issue and does not anticipate any further related
expenditures.
The Company ended all expenditures on Year 2000 testing of its healthcare
provider software products upon the sale of these assets on December 24, 1998.
In connection with the sale of the assets, the Company made certain
representations regarding the Year 2000 compliance of the Company's software
products and agreed to indemnify the buyer against losses related to a breach of
representations and certain third party claims related to the operation of the
assets prior to the sale. The Company's tests and audits of the software
products prior to the sale did not indicate any issues with Year 2000
compliance, and the Company is not aware of any Year 2000 compliance issues that
have arisen to date.
10
<PAGE> 6
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
As of December 31,
-------------------------
1999 1998
- ----------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 7,397,220 $ 7,984,675
Restricted cash 545,126 153,867
Short-term investments 1,022,847 7,083,851
Accounts receivable, net of allowance of $343,000
and $172,000, respectively 1,773,678 1,516,712
Other current assets 1,051,647 412,360
------------ ------------
Total current assets 11,790,518 17,151,465
Furniture, fixtures and equipment:
Furniture and fixtures 597,176 563,085
Computer and telephone equipment 1,570,064 772,798
Leasehold improvements 235,818 234,599
------------ ------------
2,403,058 1,570,482
Less accumulated depreciation (1,015,094) (557,496)
------------ ------------
1,387,964 1,012,986
------------ ------------
Total assets $ 13,178,482 $ 18,164,451
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 1,067,907 $ 1,024,837
Deferred revenue and payables 446,201 398,653
Accrued compensation 452,621 279,853
Net liabilities of discontinued operations 1,195,523 4,256,332
------------ ------------
Total current liabilities 3,162,252 5,959,675
COMMITMENTS AND CONTINGENCIES -- --
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value - 13,511,111 shares
authorized; 3,119,646 and 3,139,810 shares
issued and outstanding, respectively 31,196 31,398
Additional paid-in capital 67,517,873 67,591,615
Accumulated deficit (57,532,839) (55,418,237)
------------ ------------
Total shareholders' equity 10,016,230 12,204,776
------------ ------------
Total liabilities and shareholders' equity $ 13,178,482 $ 18,164,451
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
11
<PAGE> 7
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Years Ended December 31,
-------------------------------------------------
1999 1998 1997
----------- ------------ ------------
<S> <C> <C> <C>
Revenue $ 9,252,911 $ 5,782,487 $ 5,101,627
Cost of sales 6,312,255 4,027,819 3,423,173
----------- ------------ ------------
Gross profit 2,940,656 1,754,668 1,678,454
General and administrative expenses 7,507,450 5,067,863 2,767,168
----------- ------------ ------------
Loss from operations (4,566,794) (3,313,195) (1,088,714)
Interest income, net 537,093 1,199,258 1,946,162
----------- ------------ ------------
Income (loss) from continuing operations (4,029,701) (2,113,937) 857,448
Discontinued operations:
Loss from discontinued operations -- (4,706,639) (19,902,083)
Gain (loss) on disposal of discontinued operations 1,915,099 (5,832,412) --
----------- ------------ ------------
Total discontinued operations 1,915,099 (10,539,051) (19,902,083)
----------- ------------ ------------
Net loss $(2,114,602) $(12,652,988) $(19,044,635)
=========== ============ ============
Basic income (loss) per common share:
Continuing operations $ (1.29) $ (0.66) $ 0.25
Discontinued operations 0.61 (3.30) (5.82)
----------- ------------ ------------
$ 0.68) $ (3.96) $ (5.57)
=========== ============ ============
Diluted income (loss) per common share:
Continuing operations $ (1.29) $ (0.66) $ 0.24
Discontinued operations 0.61 (3.30) (5.52)
----------- ------------ ------------
$ 0.68) $ (3.96) $ (5.28)
=========== ============ ============
Weighted average shares outstanding:
Basic 3,114,726 3,191,377 3,419,620
Diluted 3,114,726 3,191,377 3,603,951
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
12
<PAGE> 8
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended December 31,
------------------------------------------------
1999 1998 1997
---------- ---------- --------
OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net loss $(2,114,602) $(12,652,988) $(19,044,635)
Adjustments to reconcile net loss to net cash
used in continuing operating activities:
Depreciation 457,598 195,820 115,491
Provision for bad debts 198,332 119,892 127,132
Loss from discontinued operations -- 4,706,639 19,902,083
Loss (gain) on disposal of discontinued operations (1,915,099) 5,832,412 --
Value of common stock issued in connection
with acquisitions -- -- 199,998
Value of options issued for consulting services 31,500 13,099 --
Changes in operating assets and liabilities:
Accounts receivable (455,298) (533,049) (408,038)
Other current assets (639,287) (212,873) (180,526)
Accounts payable and accrued expenses 90,088 (117,261) (1,568,977)
Deferred revenue and payables 47,548 92,767 156,414
Accrued compensation 172,768 168,097 (126,119)
---------- ---------- --------
Net cash used in continuing operating activities (4,126,452) (2,387,445) (827,177)
INVESTING ACTIVITIES:
Purchase of short-term investments -- (9,352,884) (26,071,047)
Sales and maturities of short-term investments 6,061,004 24,315,704 39,268,000
Purchases of furniture, fixtures and equipment (879,592) (1,019,775) (85,320)
Increase in restricted cash (391,259) (153,867) --
---------- ---------- --------
Net cash provided by investing activities 4,790,153 13,789,178 13,111,633
FINANCING ACTIVITIES:
Principal payments on long-term debt -- -- (6,920)
Payments on notes payable -- -- (100,000)
Payments on line of credit -- -- (150,000)
Net proceeds from common stock transactions 69,721 -- 413,196
Repurchase of common stock (196,913) (836,875) (2,019,100)
Net proceeds from exercise of common stock options -- 48,000 75,285
---------- ---------- --------
Net cash used in financing activities (127,192) (788,875) (1,787,539)
Cash used in discontinued operations (1,123,964) (8,577,661) (13,933,508)
---------- ---------- --------
Increase (decrease) in cash and cash equivalents (587,455) 2,035,197 (3,436,591)
Cash and cash equivalents at beginning of period 7,984,675 5,949,478 9,386,069
---------- ---------- --------
Cash and cash equivalents at end of period $ 7,397,220 $ 7,984,675 $ 5,949,478
=========== ============ ============
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid during the period for interest $ -- $ 4,386 $ 5,351
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
13
<PAGE> 9
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
<TABLE>
<CAPTION>
Common Stock Additional
------------------------- Paid - in Accumulated
Shares Amount Capital Deficit Total
--------- -------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1997 3,447,943 $ 34,479 $ 69,769,335 $(23,720,614) $ 46,083,200
Issuance of common stock 36,364 364 299,636 -- 300,000
Exercise of stock options 16,183 162 75,123 -- 75,285
Employee stock purchase plan 23,065 231 112,965 -- 113,196
Issuance of common stock
to former shareholders
of C.L. McIntosh 29,629 296 199,702 -- 199,998
Repurchase of common stock (254,867) (2,549) (2,016,551) -- (2,019,100)
Repurchase of common stock
as part of sale of subsidiary (45,841) (458) (317,566) -- (318,024)
Value of options issued
for services -- -- 72,370 -- 72,370
Value of repriced options issued -- -- 135,000 -- 135,000
Net loss -- -- -- (19,044,635) (19,044,635)
--------- -------- ------------ ------------ ------------
Balance at December 31, 1997 3,252,476 32,525 68,330,014 (42,765,249) 25,597,290
Exercise of stock options 10,667 106 47,894 -- 48,000
Repurchase of common stock (123,333) (1,233) (835,642) -- (836,875)
Value of options issued
for services -- -- 49,349 -- 49,349
Net loss -- -- -- (12,652,988) (12,652,988)
--------- -------- ------------ ------------ ------------
Balance at December 31, 1998 3,139,810 31,398 67,591,615 (55,418,237) 12,204,776
Employee stock purchase plan 41,569 416 69,305 -- 69,721
Repurchase of common stock (61,667) (617) (196,047) -- (196,664)
Fractional share redemption
in reverse split (66) (1) (251) -- (252)
Value of options issued
for services -- -- 53,251 -- 53,251
Net loss -- -- -- (2,114,602) (2,114,602)
--------- -------- ------------ ------------ ------------
Balance at December 31, 1999 3,119,646 $ 31,196 $ 67,517,873 $(57,532,839) $ 10,016,230
========= ======== ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
14
<PAGE> 10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business
Celeris Corporation and its subsidiaries ("Celeris" or the "Company") is a
provider of specialty clinical research and information technology services
that expedite and streamline the clinical trial and regulatory submission
process for pharmaceutical, medical device and biotechnology manufacturers.
These services accelerate specific functions within clinical trials and new
product submissions which often become bottlenecks for manufacturers seeking
regulatory clearance to market new products. Delays in obtaining regulatory
clearance for new products can result in significant lost revenues and
increased expenses for manufacturers. As a consequence, manufacturers have
increasingly outsourced clinical research functions to organizations, such as
the Company, that can offer expertise and services which speed the product
development process.
The Company has experienced operating losses for each of the past five years.
Net losses for the year ended December 31, 1999 were $2,114,602, and the Company
had an accumulated deficit of $57,532,839 at December 31, 1999. The Company's
ability to increase revenue and achieve profitability and positive cash flow
will depend on a number of factors including (i) the Company's ability to
control costs and keep increases in expenditures below growth in revenue, if
any; (ii) obtaining market acceptance of the Company's service offerings in an
intensely competitive market for clinical research services; (iii) the Company's
ability to attract and integrate new key employees and to develop new
operational and financial systems, procedures and controls related to the new
service offerings; (iv) risks associated with the Company's decision to exit
from the healthcare provider software market, including the failure to realize
the Company's assumptions regarding estimated charges; and (v) the possibility
of adverse outcomes related to the Company's shareholder lawsuits, Securities
and Exchange Commission investigation or declaratory action by the underwriters
of the Company's directors' and officers' insurance policies discussed in
Note 7. There can be no assurances that the Company will generate revenue, or
adequately control costs, to achieve profitability or positive cash flow.
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 intercompany balances and transactions have
been eliminated.
Revenue Recognition
Revenue on fee for service contracts is recognized when the related service has
been rendered. Revenue for services rendered in connection with contractual
arrangements other than fee-for-service contracts is recognized using the
percentage-of-completion method of accounting, in accordance with the
Accounting Standards Executive Committee of the American Institute of Certified
Public Accountants ("AcSEC") Statement of Position 81-1, "Accounting for
Performance of Construction-Type and Certain Production-Type Contracts."
Contracts generally range in duration from a few months to in excess of one
year. Revenue is recognized as costs are incurred on the basis of the
relationship between costs incurred and total estimated costs.
15
<PAGE> 11
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with maturities
of three months or less to be cash equivalents. Cash equivalents are carried at
cost, which approximates market value. As of December 31, 1999, the Company had
approximately $545,000 subject to withdrawal restrictions as a condition of
certain lease agreements for office space and equipment. The amount of cash
restricted under the lease agreements decreases periodically over the term of
the leases, which extend to December 2002.
Short-Term Investments
Investments with a maturity of more than 90 days at the date of purchase are
classified as short-term investments. Management determines the appropriate
classification of debt securities at the time of purchase and reevaluates such
designation as of each balance sheet date. The Company has classified its
short-term investments, consisting of U.S. agency bonds, as available for sale.
At December 31, 1999 and 1998, the fair market value of the short-term
investments approximated cost.
Accounts Receivable and Allowance for Doubtful Accounts
The Company's customers consist of pharmaceutical, medical device and
biotechnology manufacturers. Accounts receivable represent receivables from
customers in the ordinary course of business. The Company determines an
allowance for doubtful accounts based upon an analysis of the collectability of
specific accounts and the aging of the accounts receivable. The Company is
subject to losses from uncollectible receivables in excess of its reserves.
Other Current Assets
On January 31, 2000, the company received $600,000 in proceeds from the sale of
its discontinued healthcare provider software segment which were due December
31, 1999. As a result, the Company recorded a receivable for these proceeds at
December 31, 1999, which has been included in other current assets in the
accompanying consolidated balance sheets. The corresponding gain was recorded
as a gain on disposal of discontinued operations on the accompanying
consolidated statements of operations for the year ending December 31, 1999.
Furniture, Fixtures and Equipment
Furniture, fixtures and equipment are stated at cost. The Company provides for
depreciation using accelerated methods at rates designed to amortize the cost
of furniture, fixtures and equipment over their estimated useful lives of three
to five years.
The Company evaluates the carrying value of long-lived equipment and fixtures
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's evaluation considers nonfinancial data
such as changes in the operating environment and business strategy, competitive
information, market trends and operating performance. Based on this evaluation,
the Company has not identified any impaired long-lived assets at December 31,
1999.
16
<PAGE> 12
Income Taxes
The Company accounts for income taxes using the liability method, in accordance
with SFAS No. 109, "Accounting for Income Taxes." Deferred income taxes are
calculated for the temporary differences between financial reporting and tax
bases of assets and liabilities.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
Fair Value of Financial Instruments
The carrying amounts related to cash and cash equivalents,restricted
cash,short-term investments, accounts receivable, other current assets,
accounts payable and accrued expenses, deferred revenue and payables, accrued
compensation, and liabilities of discontinued operations approximate fair value
at December 31, 1999 and 1998 due to the relatively short maturities of such
investments.
Recently Issued Accounting Pronouncements
The Company adopted the AcSEC's Statement of Position 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use" "SOP 98-1" on
January 1, 1999. SOP 98-1 provides guidance on accounting for the costs of
computer software developed or obtained for internal use. Adoption of SOP 98-1
did not have a material impact on the Company's results of operations, financial
condition or cash flows.
Legal Costs
The Company's policy is to accrue all probable and estimatable legal fees as
they are identified.
Reclassifications
Certain amounts previously reported in the 1998 and 1997 financial statements
have been reclassified to conform to the 1999 presentation. These
reclassifications had no effect on previously reported net loss or
shareholders' equity.
3. Discontinued Operations
On June 10, 1998, the Company announced its intention to transition out of the
healthcare provider software market and direct its resources on its clinical
research services segment. As a result of this decision, the Company recorded a
charge of $5.35 million in 1998 to dispose of the software segment. This charge
represented management's estimate of the costs to exit the software business
including employee severance and retention, facility restructuring, operating
losses through the disposal period, and fulfillment of remaining contractual
obligations.
17
<PAGE> 13
On December 24, 1998, the Company completed a sale of the healthcare provider
software business. As consideration for the sale, the Company agreed to a net
purchase price of up to $2.0 million, contingent upon the performance of the
assets sold and the buyer's cost to perform prepaid support and service
obligations after the closing. In addition, the Company agreed to reimburse the
buyer for the performance of prepaid support and service obligations on
assigned contracts in the amount of $500,000. As a result of the sale
transaction, the Company recorded a charge of $483,000 in the fourth quarter of
1998 representing the net book value of the assets sold and liabilities
transferred to the buyer net of cash received at closing and related
transaction costs. The charge also represented the net effect of a reassessment
of the obligations retained after the sale by the Company.
The Company has determined that, based upon the terms of the sale agreement,
the purchase price would be fixed at $1.5 million. To date, the Company has
received the total proceeds from the sale, all of which have been recorded as
gain on the disposal of discontinued operations. Proceeds in the amount of
$900,000 were received prior to December 31, 1999. The remaining amount of
$600,000 was collected on January 31, 2000, and was recorded as an other
current asset at December 31, 1999.
In the fourth quarter of 1999, the Company lowered its estimates of liabilities
retained from the health-care provider software business and, in doing so,
recorded an additional gain on the disposal of discontinued operations of
$615,000. The Company estimates its retained liabilities from the discontinued
operations to be $1.2 million as of December 31, 1999, including certain
amounts due under customer contracts and other liabilities related to the
disposal of the segment.
The financial position and results of operations of the healthcare provider
software segment are reported as discontinued operations in the accompanying
consolidated financial statements and all prior period amounts have been
restated to reflect the discontinued operations. Revenues related to the
discontinued segment prior to the sale on December 24, 1998 were $3,125,715,
$7,978,469, and $13,500,301 for the years ended December 31, 1998, 1997, 1996,
respectively.
4. Income (Loss) Per Common Share
Basic income (loss) per common share is computed by dividing income (loss) for
the period by the weighted average number of shares of common stock outstanding
during the period. The computation of diluted income (loss) per common share
requires that the number of weighted average shares outstanding be increased for
the assumed exercise of dilutive options using the modified treasury stock
method.
Weighted average shares used in computing income (loss) per share are as
follows:
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Weighted average common shares outstanding 3,114,726 3,191,377 3,419,620
Dilutive effect of stock options outstanding,
using modified treasury stock method -- -- 184,331
--------- --------- ---------
Shares used in computing diluted income
(loss) per share 3,114,726 3,191,377 3,603,951
========= ========= =========
</TABLE>
18
<PAGE> 14
Diluted loss per share for the years ended December 31, 1999 and 1998 does not
include common stock equivalents of 1,190,263 and 834,138, respectively, as
their effect would be antidilutive.
5. Merger
During 1997, the Company paid the selling shareholders of C.L. McIntosh, a
regulatory consulting and clinical research services firm acquired in 1996,
$1,800,000, issued shares of common stock totaling 29,629 at $6.75 per share,
and canceled and reissued options repriced at $8.25 per share, primarily in
exchange for their release from potential claims, including potential liability
associated with the Company's restatement of revenues in early 1997.
6. Common Stock
In August 1997, the Company announced a stock repurchase program to buyback up
to 666,667 shares. At December 31, 1999, the Company had repurchased 439,867
shares in conjunction with this program at prices ranging from $2.44 to $10.13,
for a total of $3,052,809.
On July 26, 1999, the Board of Directors declared a one-for-three reverse stock
split applicable to shareholders of record July 29, 1999. The stated par value
of the Company's common stock was not changed from $0.01. As a result, a total
of $61,646 was reclassified from common stock to additional paid-in capital.
Income (loss) per share, common stock outstanding and stock option data
referred to in the accompanying consolidated financial statements and notes
hereto have been adjusted retroactively to give effect to the reverse stock
split.
7. Commitments and Contingencies
Litigation
The Company is a defendant in IN RE SUMMIT MEDICAL SYSTEMS, INC. SECURITIES
LITIGATION, a consolidated federal court securities action venued in the United
States District Court, District of Minnesota. The putative class action was
filed on March 10, 1997 and alleges violations of Section 10(b) of the
Securities and Exchange Act of 1934, as amended (the "Exchange Act") and Rule
10b-5, Section 20(a) of the Exchange Act, Section 11 of the Securities Act of
1933, as amended (the "Securities Act"), and Section 15 of the Securities Act.
The Company is also a defendant in a federal court securities action captioned
TEACHERS' RETIREMENT SYSTEM OF LOUISIANA V. SUMMIT MEDICAL SYSTEMS, INC. ET.
AL. The Teachers' Retirement action was filed on April 16, 1997 in the United
States District Court, District of Minnesota and is not a class action. In
addition to the claims alleged in the consolidated action, the Teachers'
Retirement complaint alleges a claim under Section 18(a) of the Exchange Act,
common law fraud, and negligent misrepresentation. Each action alleges, in
essence, that the Company made misleading public disclosures relating to its
financial statements and seeks compensatory damages for losses incurred as a
result of each alleged misleading public disclosure. As to federal securities
law claims, both actions are subject to the Private Securities Litigation
Reform Act of 1995 (the "Reform Act"). The actions do not state the monetary
damages that are being sought at this time. The Company intends to defend
against these actions vigorously. There can be no assurance that any judgment,
order or decree against the Company arising out of these actions will not have
a material adverse effect on the Company or its business.
19
<PAGE> 15
The Division of Enforcement of the Securities and Exchange Commission (the
"Commission") began an investigation of the Company on March 27, 1997, relating
to the Company's restatement of certain financial statements. The Company is
cooperating fully with the Commission and its investigation. There can be no
assurance that any order, decree or other action issued or taken by the
Commission arising out of its investigation will not result in sanctions
against the Company or certain individuals that could have a material adverse
effect on the Company or its business.
The Company and certain of the Company's directors and former officers are
defendants in a declaratory relief action, DAVID FOSTER ET. AL. V. SUMMIT
MEDICAL SYSTEMS, INC. ET. AL., venued in the District Court of Hennepin County,
Minnesota. The action was initiated on August 7, 1998 and seeks a declaration
that there is no coverage under the Company's directors' and officers'
insurance policies for the Company's pending federal securities actions or the
investigation by the Commission. The plaintiffs, the insurance underwriters of
the Company's directors' and officers' insurance policies, allege that the
claims the Company has submitted for coverage involve matters commenced before
the period covered by the policies. Additionally, the plaintiffs allege that
the Commission's investigation does not constitute a proper claim under the
policies. The Company believes the plaintiffs' request for declaratory judgment
misinterprets the Company's directors' and officers' insurance policy. On July
22, 1999, the District Court of Hennepin County, Minnesota ruled in favor of
the Company's motion for summary judgment in the declaratory relief action,
DAVID FOSTER ET. AL. V. SUMMIT MEDICAL SYSTEMS, INC. ET. AL. The District Court
held that the Company's directors' and officers' insurance policies cover
claims related to the Company's pending federal securities actions and the
investigation by the Commission. On October 6, 1999, the insurance underwriters
filed a notice of appeal of the District Court's order with the Minnesota Court
of Appeals. The Company intends to oppose this action vigorously and has filed
a counterclaim to enforce coverage under the policy, including advancement of
expenses. There can be no assurance that any order, decree or declaration
arising out of this matter will not have a material adverse effect on the
Company or its business.
Leases
The Company leases its office space and certain office equipment under various
operating leases which expire at various dates through August 2003. The Company
is required to pay a pro rata share of taxes and utilities for each of the
office locations. Future minimum payments under the leases at December 31, 1999
are as follows:
<TABLE>
<CAPTION>
Fiscal year
<S> <C>
2000 $ 980,705
2001 763,385
2002 638,186
2003 294,663
2004 --
Thereafter --
----------
$2,676,939
==========
</TABLE>
20
<PAGE> 16
Rent expense related to continuing operations for the years ended December 31,
1999, 1998 and 1997 was $917,985, $564,778, and $235,451, respectively.
8. Income Taxes
As of December 31, 1999, the Company had a net operating loss ("NOL") and AMT
credit carryforwards of approximately $51,058,000 and $37,000, respectively,
available to offset its future income tax liability. The NOL and tax credit
carryforwards begin to expire in the year 2009.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax assets and liabilities as of December 31 are as
follows:
<TABLE>
<CAPTION>
1999 1998
--------------------------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 19,402,000 $ 15,400,000
Temporary differences-
Purchase of in-process research and development -- 2,366,000
Other reserves and accrued expenses 697,000 2,241,000
Valuation allowance (20,099,000) (20,007,000)
-------------------------------
Net deferred tax asset $ -- $ --
===============================
</TABLE>
A valuation allowance for the entire deferred tax asset has been provided
because of the Company's history of operating losses. As a result of sales of
common stock during the past three years, ownership changes under Section 382
of the Internal Revenue Code may have occurred. Section 382 may limit the
amount of NOLs that can be utilized in the future.
9. Stock Options
The Company has established the Stock Option Plan of 1993, for which 875,555
shares of common stock are reserved. All officers, employees and consultants of
the Company are eligible to receive stock option grants under this plan. The
options held by employees of the Company are incentive stock options within the
meaning of Section 422 of the Internal Revenue Code. The options held by
officers and consultants of the Company can be either incentive stock options
or nonstatutory options. The option price is equal to the fair market value of
the common stock on the date of grant. Options vest and become exercisable at
various intervals and expire ten years from the date of grant.
The Company has also adopted the 1995 Director Plan, for which 22,222 shares of
common stock have been reserved. The plan provides for an automatic grant of
nonqualified stock options to purchase 2,222 shares of common stock to
nonemployee directors on the date such individuals are first appointed
directors of the Company, and an automatic grant of an option to purchase an
additional 667 shares of common stock on the day after each subsequent annual
meeting of the Company's shareholders. The
21
<PAGE> 17
option price is equal to the fair market value of the common stock on the date
of grant. Options vest and become exercisable as to 100% of such shares on the
first anniversary of the date of such grant and expire ten years from the date
of grant.
In addition to the options granted under the Stock Option Plan of 1993 and the
1995 Director Plan, the Company has issued options outside of the plans,
primarily as consideration for acquisitions. As of December 31, 1999, the
Company has 250,555 such options outstanding.
Option activity is summarized as follows:
<TABLE>
<CAPTION>
Weighted
Average
Shares Nonplan Exercise
Available Plan Options Options Price Per
for Grant Outstanding Outstanding Share
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at January 1, 1997 108,891 578,340 232,963 $ 19.95
Shares Reserved 166,667 -- -- --
Granted (535,833) 535,833 237,667 9.00
Exercised -- (14,559) (1,625) 4.65
Canceled 552,773 (552,773) (201,115) 23.28
------------------------------------------------------
Balance at December 31, 1997 292,498 546,841 267,890 8.70
Granted (333,056) 333,056 7,779 6.09
Exercised -- (10,667) -- 4.50
Canceled 300,092 (300,092) (10,666) 8.55
------------------------------------------------------
Balance at December 31, 1998 259,534 569,138 265,003 7.83
Granted (542,152) 542,152 5,557 2.19
Exercised -- -- -- --
Canceled 190,475 (190,475) (1,112) 8.07
------------------------------------------------------
Balance at December 31, 1999 (92,143) 920,815 269,448 $ 5.21
======================================================
</TABLE>
During 1997, the Company canceled and reissued previously granted options held
by employees to purchase shares of common stock with original exercise prices
that ranged from $14.25 to $51.75 per share and replaced them with new options
with an exercise price of $8.07 per share. Also, during 1997, the Company
canceled and reissued options and warrants including shares issued in
conjunction with certain acquisitions.
During 1999, the Company's stock option grants exceeded the shares available
for grant under the Stock Option Plan of 1993. As a result, the shareholders of
the Company will be asked to approve an additional 130,000 shares for issuance
as stock options under the Stock Option Plan of 1993 at the Company's Annual
Meeting.
22
<PAGE> 18
The following table summarizes information about the stock options outstanding
at December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------- --------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$1.47 - 2.99 457,283 9.90 $ 1.97 81,998 $ 1.88
$3.00 - 3.99 154,887 9.03 3.28 24,579 3.22
$4.00 - 6.99 49,823 3.78 5.44 39,997 5.47
$7.00 - 11.99 513,045 7.00 8.26 310,480 8.20
$12.00- 23.64 15,225 7.31 18.49 11,307 18.53
---------------------------------------------------------------
1,190,263 8.24 $ 5.21 468,361 $ 6.85
===============================================================
</TABLE>
Options outstanding expire at various dates during the period from 2000 through
2006. Exercise prices for options outstanding as of December 31, 1999 ranged
from $1.47 to $23.64 per share. The number of options exercisable as of
December 31, 1999, 1998 and 1997 were 468,361, 342,510, and 164,052,
respectively, at weighted average exercise prices of $6.85, $8.28 and $9.45 per
share, respectively.
The weighted average grant date fair value of plan options granted at market
prices during the years ended December 31, 1999, 1998 and 1997 was $2.19, $5.04
and $5.61 per share, respectively. The weighted average grant date fair value
of nonplan options granted at market prices during the years ended December 31,
1999, 1998 and 1997 was $3.30, $8.97 and $6.57, respectively. No nonplan
options were granted below market prices during the years ended December 31,
1999, 1998 and 1997.
The Company applies Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations in accounting for its
stock option plans. Accordingly, no compensation cost has been recognized in
the accompanying consolidated statements of operations. Had compensation cost
been recognized based on the fair values of options at the grant dates
consistent with the provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation," the Company's net loss and net loss per common share would have
been increased to the following pro forma amounts:
<TABLE>
<CAPTION>
1999 1998 1997
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net loss:
As reported $ (2,114,602) $ (12,652,988) $ (19,044,635)
Pro forma (2,662,384) (13,403,598) (19,844,559)
Basic loss per common share:
As reported (0.68) (3.96) (5.57)
Pro forma (0.85) (4.20) (5.80)
Diluted loss per common share:
As reported (0.68) (3.96) (5.28)
Pro forma (0.85) (4.20) (5.51)
</TABLE>
23
<PAGE> 19
Because the SFAS No. 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the resulting pro forma compensation cost may
not be representative of that to be expected in future years. The fair value
for these options was estimated at the date of grant using the Black-Scholes
option pricing model with the following weighted-average assumptions for 1999,
1998 and 1997, respectively: risk-free interest rate of 5.5%, 5.1% and 6.0%; no
dividend yield; volatility factors of 137.0%, 108.0% and 86.5%; and a weighted
average expected life of the options of 6.0, 6.0 and 5.0 years.
10. Employee Benefit Plans
Employee Stock Purchase Plans
Under the 1995 Employee Stock Purchase Plan, 44,444 shares of common stock were
reserved and issued at December 31, 1998. Effective January 1, 1999, the
Company adopted the Celeris Corporation Employee Stock Purchase Plan under
which 166,667 shares are reserved. All employees who have met the service
eligibility requirements are eligible to participate in this new plan and may
direct the Company to make payroll deductions of 1% to 15% of their
compensation during a purchase period for the purchase of shares under the
plan. The Celeris Corporation Employee Stock Purchase Plan provides
participating employees the right, subject to certain limitations, to purchase
the Company's common stock at a price equal to the lower of 85% of the fair
market value of the Company's common stock on the first day, or the last day,
of the applicable purchase period. The first purchase period commenced January
1, 1999 and ended on June 30, 1999. Subsequent purchase periods will run for
six months, subject to acceleration in the case of a merger or consolidation in
which the Company is not the surviving corporation, or the liquidation,
dissolution or sale of substantially all of the assets of the Company.
401(k) Plan
All employees who are at least 18 years of age are eligible to participate in
the Company's 401(k) plan. Each employee may contribute from 1% to 15% of their
eligible compensation to the plan. The Company may make discretionary matching
contributions to the plan based on employee contributions. No matching
contributions were made by the Company in 1999, 1998 and 1997.
11. Segment Reporting and Significant Customer Information
The Company adopted SFAS No. 131, "Disclosures About Segments of an Enterprise
and Related Information," in the fourth quarter of 1998. SFAS No. 131
established standards for disclosure of financial information related to
operating segments of the Company as well as disclosure requirements for
customer and geographic information. SFAS No. 131 defines an operating segment
as a component of a company for which operating results are reviewed regularly
by the chief operating decision maker to determine resource allocation and
assess performance. The Company has four segments reportable under the
guidelines of SFAS No. 131: the Company's clinical monitoring services group, a
start-up operation formed in the first quarter of 1998; data management
services group, a start-up operation formed in the fourth quarter of 1998;
regulatory consulting services group; and the Company's corporate operating
function.
24
<PAGE> 20
The Company's operating segment disclosures are as follows:
<TABLE>
<CAPTION>
Clinical Data
Monitoring Management Regulatory
Services Services Consulting Corporate Consolidated
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1999
- ------------------------
Revenue $ 621,072 $ 1,913,137 $ 6,718,702 $ -- $ 9,252,911
Depreciation 102,582 236,503 118,513 -- 457,598
Interest income, net -- -- -- 537,093 537,093
Loss from continuing
operations (1,279,593) (650,689) (94,968) (2,004,451) (4,029,701)
Segment assets 487,339 1,051,932 1,859,070 9,780,141 13,178,482
Capital expenditures 120,875 700,926 57,791 -- 879,592
1998
- ------------------------
Revenue $ 32,300 $ 66,120 $ 5,684,067 $ -- $ 5,782,487
Depreciation 40,361 44,351 111,108 -- 195,820
Interest income, net -- -- 634 1,198,624 1,199,258
Income (loss) from
continuing operations (1,429,145) (596,118) (217,423) 128,749 (2,113,937)
Segment assets 343,527 551,376 2,073,629 15,195,919 18,164,451
Capital expenditures 330,084 538,908 150,783 -- 1,019,775
1997
- ------------------------
Revenue $ -- $ -- $ 5,101,627 $ -- $ 5,101,627
Depreciation -- -- 115,491 -- 115,491
Interest income, net -- -- -- 1,946,162 1,946,162
Income from continuing
operations -- -- 414,445 443,003 857,448
Segment assets -- -- 1,675,861 27,812,361 29,488,222 (a)
Capital expenditures -- -- 85,320 -- 85,320
</TABLE>
(a) excludes net long-term assets of discontinued operations of $1,182,335 at
December 31, 1997.
Revenues from individual clients generated by the Company that represent
greater than 10% of consolidated revenues are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Client A $ 2,221,241 <10% <10%
Client B $ 1,369,246 <10% <10%
Client C <10% $ 760,461 $ 568,249
Client D <10% $ 620,055 <10%
</TABLE>
25
<PAGE> 21
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Celeris Corporation:
We have audited the accompanying consolidated balance sheets of Celeris
Corporation (formerly Summit Medical Systems, Inc.) (a Minnesota corporation)
and Subsidiaries as of December 31, 1999 and 1998, and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the
three years in the period ended December 31, 1999. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Celeris Corporation and Subsidiaries as of December 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1999 in conformity with accounting principles
generally accepted in the United States.
/s/ Arthur Andersen, LLP
Nashville, Tennessee
February 1, 2000
26
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our reports incorporated by reference in this Form 10-K, into the Company's
previously filed Registration Statements on Form S-8 (File Nos. 33-80927,
333-63169, 333-63249 and 333-82539).
/s/ ARTHUR ANDERSEN LLP
Nashville, Tennessee
March 23, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF CELERIS CORPORATION DATED DECEMBER 31, 1999
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 7,942,346
<SECURITIES> 1,022,847
<RECEIVABLES> 1,773,678
<ALLOWANCES> 343,000
<INVENTORY> 0
<CURRENT-ASSETS> 11,790,518
<PP&E> 1,387,964
<DEPRECIATION> 0
<TOTAL-ASSETS> 13,178,482
<CURRENT-LIABILITIES> 3,162,252
<BONDS> 0
0
0
<COMMON> 31,196
<OTHER-SE> 9,985,034
<TOTAL-LIABILITY-AND-EQUITY> 13,178,482
<SALES> 9,252,911
<TOTAL-REVENUES> 9,252,911
<CGS> 6,312,255
<TOTAL-COSTS> 7,507,450
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (4,566,794)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,566,794)
<DISCONTINUED> 1,915,099
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,114,602)
<EPS-BASIC> (0.68)
<EPS-DILUTED> (0.68)
</TABLE>
