As filed with the Securities and Exchange Commission on October 17, 2001
Registration No. __________
==============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
CELERITY SYSTEMS, INC.
(Name of Registrant in Our Charter)
Delaware 5136 52-2050585
(State or Other Jurisdiction (Primary Standard (I.R.S. Employer
of Incorporation Industrial Identification No.)
or Organization) Classification Code
Number)
122 PERIMETER PARK DRIVE KENNETH D. VAN METER
KNOXVILLE, TENNESSEE 37922 122 PERIMETER PARK DRIVE
(865) 539-5300 KNOXVILLE, TENNESSEE 37922
(Address and telephone number (865) 539-5300
of Principal
Executive Offices and (Name, address and telephone
Principal Place of Business) number of agent for service)
Copies to:
Clayton E. Parker, Esq. Troy J. Rillo, Esq.
Kirkpatrick & Lockhart LLP Kirkpatrick & Lockhart LLP
201 S. Biscayne Boulevard 201 S. Biscayne Boulevard
Suite 2000 Suite 2000
Miami, Florida 33131 Miami, Florida 33131
(305) 539-3300 (305) 539-3300
Telecopier No.: (305) 358-7095 Telecopier No.: (305) 358-7095
Approximate date of commencement of proposed sale to the public: AS SOON
AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933 check the following box. |X|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
CALCULATION OF REGISTRATION FEE
=============================================================================================================
Proposed
Proposed Maximum
Maximum Aggregate Amount Of
Title Of Each Class Of Amount To Be Offering Price Offering Registration
Securities To Be Registered Registered Per Share(1) {Price (1) Fee
-------------------------------------------------------------------------------------------------------------
Common stock, par value $0.001 per share 66,645,721 Shares $0.075 $4,998,429 $1,249.61
Common stock underlying preferred stock 39,500,000 Shares $0.075 $2,962,500 $740.63
Common stock underlying options 664,380 Shares $0.075 $49,828 $12.46
Common stock underlying warrants 12,871,147 Shares $0.075 $965,336 $241.33
Common stock underlying convertible debentures 108,759,363 Shares $0.075 $8,156,952 $2,039.24
-------------------------------------------------------------------------------------------------------------
TOTAL 228,440,611 Shares $0.075 $17,133,045 $4,283.27
=============================================================================================================
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) under the Securities Act of 1933. For the purposes
of this table, we have used the average of the closing bid and asked
prices as of October 14, 2001.
-----------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
Subject to completion, dated October 17, 2001
CELERITY SYSTEMS, INC.
228,440,611 SHARES OF COMMON STOCK
This prospectus relates to the sale of up to 228,440,611 shares of our
common stock by certain persons who are, or will become, stockholders of
Celerity. Please refer to "Selling Stockholders" beginning on page 13. Celerity
is not selling any shares of common stock in this offering and therefore will
not receive any proceeds from this offering. Celerity will, however, receive
proceeds from the sale of common stock under the Equity Line of Credit. All
costs associated with this registration will be borne by us. Celerity has also
agreed to pay Yorkville Advisors, LLC a fee of 10.0% of the proceeds raised by
us under the Equity Line of Credit.
The shares of common stock are being offered for sale on a "best
efforts" basis by the selling stockholders at prices established on the
Over-the-Counter Bulletin Board during the term of this offering. There are no
minimum purchase requirements. These prices will fluctuate based on the demand
for the shares of common stock.
The selling stockholders consist of:
o Cornell Capital Partners and holders of convertible debentures
that intend to sell up to 164,314,919 shares of common stock.
o Other selling stockholders, which intend to sell up to
64,125,692 shares of common stock purchased in private
offerings.
Cornell Capital Partners, L.P. is an "underwriter" within the meaning
of the Securities Act of 1933 in connection with the sale of common stock under
the Equity Line of Credit Agreement. Cornell Capital Partners, L.P. will pay
Celerity 82% of the market price of our common stock. The 18% discount on the
purchase of the common stock to be received by Cornell Capital Partners, L.P.
will be an underwriting discount.
Our common stock is quoted on the Over-the-Counter Bulletin Board under
the symbol "CLRT." On October 14, 2001, the last reported sale price of our
common stock on the Over-the-Counter Bulletin Board was $0.075 per share.
THESE SECURITIES ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK.
PLEASE REFER TO "RISK FACTORS" BEGINNING ON PAGE 7.
PRICE TO PUBLIC* PROCEEDS TO SELLING SHAREHOLDERS
Per share $0.075 $0.075
------ ------
Total $0.075 $17,133,045
====== ===========
With the exception of Cornell Capital Partners, L.P., which is an
"underwriter" within the meaning of the Securities Act of 1933, no underwriter
or any other person has been engaged to facilitate the sale of shares of common
stock in this offering. This offering will terminate sixty days after Cornell
Capital Partners has advanced $10.0 million or June 14, 2003, whichever occurs
first. None of the proceeds from the sale of stock by the selling stockholders
will be placed in escrow, trust or any similar account.
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS
HAVE NOT APPROVED OR DISAPPROVED OF THESE SECURITIES, OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this prospectus is ___________ ___, 2001.
TABLE OF CONTENTS
PROSPECTUS SUMMARY.............................................................3
SUMMARY FINANCIAL INFORMATION..................................................5
RISK FACTORS...................................................................7
FORWARD-LOOKING STATEMENTS....................................................12
SELLING STOCKHOLDERS..........................................................13
USE OF PROCEEDS...............................................................18
DILUTION......................................................................19
CAPITALIZATION................................................................20
EQUITY LINE OF CREDIT.........................................................21
PLAN OF DISTRIBUTION..........................................................23
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.....................24
DESCRIPTION OF BUSINESS.......................................................30
MANAGEMENT....................................................................38
DESCRIPTION OF PROPERTY.......................................................43
LITIGATION PROCEEDINGS........................................................43
PRINCIPAL SHAREHOLDERS........................................................44
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................................48
MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S
COMMON EQUITY AND OTHER SHAREHOLDER MATTERS...................................50
DESCRIPTION OF SECURITIES.....................................................51
EXPERTS.......................................................................52
LEGAL MATTERS.................................................................52
AVAILABLE INFORMATION.........................................................53
FINANCIAL STATEMENTS.........................................................F-1
------------------------------------------------------------------------------
We intend to distribute to our shareholders annual reports containing
audited financial statements. Our audited financial statements for the fiscal
year December 31, 2000, were contained in our Annual Report on Form 10-KSB.
2
PROSPECTUS SUMMARY
OUR COMPANY
Celerity develops and manufactures digital video servers and digital
set top boxes for the interactive television and high speed Internet market. We
have developed a new digital set top box called the T6000. The T6000 makes
television sets Internet ready, allowing users to send e-mails, surf the
Internet and interact with new forms of entertainment from a television set.
In the near-term, Celerity expects to focus its sales efforts in the
following market segments:
o MULTIPLE DWELLING UNITS. We believe this market segment is
attractive as these multiple dwelling units permit us an
opportunity to install our products in a large number of units
by contracting with a single property owner. These
installations can be made in new developments or existing
structures.
o HOSPITALITY. We also believe that the hospitality (E.G.,
hotels) market is promising because installations can occur in
multiple units at a single property. Again, these
installations can be made in new developments or existing
structures.
o EDUCATION. We have also targeted the education market because,
we believe, federal, state and local governments will over the
near-term increase spending to improve technology in the
education market.
ABOUT US
Our principal office is located at 122 Perimeter Park Drive, Knoxville,
Tennessee 37922, telephone number (865) 539-5300.
THE OFFERING
This offering relates to the sale of common stock by certain persons
who are, or will become, our stockholders. The selling stockholders consist of:
o Cornell Capital Partners and holders of convertible debentures
that intend to sell up to 164,314,919 shares of common stock.
o Other selling stockholders, which intend to sell up to 64,125,692
shares of common stock purchased in private offerings.
Pursuant to the Equity Line of Credit, we may, at our discretion,
periodically issue and sell to Cornell Capital Partners, L.P. shares of common
stock for a total purchase price of $10.0 million. Cornell Capital Partners,
L.P. will purchase the shares of our common stock for a 18% discount to the
prevailing market price of our common stock. Cornell Capital Partners, L.P.
intends to sell any shares purchased under the Equity Line of Credit at the then
prevailing market price. This prospectus relates to the shares of our common
stock to be issued under the Equity Line of Credit.
COMMON STOCK OFFERED 228,440,611 shares by selling
stockholders
OFFERING PRICE Market price
COMMON STOCK OUTSTANDING BEFORE THE OFFERING(1) 67,607,657 shares
-------------------
(1 This table excludes outstanding options, warrants, convertible
debentures and preferred stock, which, if exercised or converted into
shares of common stock, together with the shares of common stock to be
issued under the Equity Line of Credit, would result in Celerity
issuing an additional 184,779,720 shares of common stock.
3
USE OF PROCEEDS We will not receive any
proceeds of the shares
offered by the selling
stockholders. Any proceeds we
receive from the sale of our
common stock under the Equity
Line of Credit will be used
for general corporate
purposes.
RISK FACTORS The securities offered hereby
involve a high degree of risk
and immediate substantial
dilution. See "Risk Factors"
and "Dilution."
OVER-THE-COUNTER BULLETIN BOARD SYMBOL CLRT
4
SUMMARY FINANCIAL INFORMATION
The following information was taken from Celerity's financial
statements for the quarter ended June 30, 2001 (unaudited) and the year ended
December 31, 2000 (audited) appearing elsewhere in this filing. This information
should be read in conjunction with such financial statements and the notes
thereto. In management's opinion all adjustment (consisting of normal recurring
items) considered necessary for a fair presentation have been included.
FOR THE SIX MONTHS ENDED FOR THE YEAR ENDED
JUNE 30, 2001 DECEMBER 31, 2000
------------------------------- ----------------------------
STATEMENT OF OPERATION DATA:
Revenues
$ 2,400 $ --
Cost of revenues 3,240 717,755
------------------ ------------------
Gross margin (840) (717,755)
Operating expenses 1,343,310 3,666,014
------------------ ------------------
Loss from operations (1,344,150) (4,383,769)
Interest expense (228,691) (930,740)
Income on equity warrant liability 491,048 --
Other income 18,380 (8,084)
------------------ ------------------
Loss from continuing operations $ (1,063,415) $ (5,322,593)
Discontinued operations:
Income on disposal of discontinued CD-ROM
segment -- 35,094
Cumulative effect of change in accounting method 2,598,813 --
------------------ -----------------
Net income (loss) 1,535,400 (5,287,499)
Amortization of beneficial conversion feature
and accretion of redeemable convertible
preferred stock (144,335) 33,942
Accretion of redeemable preferred stock -- 298,966
------------------ ------------------
Net income (loss) applicable to common
shareholders $ 1,391,065 $ (5,620,407)
================== ==================
Basic and diluted income (loss) per common
shares:
Loss from continuing operations $ 0.02 $ (0.49)
Discontinued operations -- --
Cumulative effect of change in accounting
method 0.05 --
------------------ ------------------
Net income (loss) per share to common
shareholders $ 0.03 $ (0.49)
================== ==================
5
JUNE 30, 2001 DECEMBER 31, 2000
--------------------------- -----------------------------
BALANCE SHEET DATA:
Cash
$ 54,453 $ 10,366
Inventory, net 1,746,685 400,157
Total current assets 1,802,138 410,523
Property and equipment, net 560,687 100,375
Total assets 2,559,500 609,043
Accounts payable 1,496,430 684,103
Equity warrant liability 1,137,874 --
Total current liabilities 3,701,164 1,863,112
Long-term debt and capital lease obligations
less current maturities 530,425
1,027,835
Total liabilities 4,728,999 2,393,537
Series A convertible preferred stock -- 168,357
Series B convertible preferred stock 144,334 --
Common stock 49,858 24,641
Additional paid-in capital 29,991,258 30,407,547
Treasury stock (227,500) (227,500)
Equity placement fee (1,363,975) --
Accumulated deficit (30,766,474) (32,157,539)
Total stockholders' equity (2,316,833) (1,952,851)
Total liabilities, redeemable preferred
stock and stockholders' equity
$ 2,559,500 $ 609,043
6
RISK FACTORS
We are subject to various risks which may materially harm our business,
financial condition and results of operations. YOU SHOULD CAREFULLY CONSIDER THE
RISKS AND UNCERTAINTIES DESCRIBED BELOW AND THE OTHER INFORMATION IN THIS FILING
BEFORE DECIDING TO PURCHASE OUR COMMON STOCK. IF ANY OF THESE RISKS OR
UNCERTAINTIES ACTUALLY OCCUR, OUR BUSINESS, FINANCIAL CONDITION OR OPERATING
RESULTS COULD BE MATERIALLY HARMED. IN THAT CASE, THE TRADING PRICE OF OUR
COMMON STOCK COULD DECLINE AND YOU COULD LOSE ALL OR PART OF YOUR INVESTMENT.
RISKS RELATED TO OUR BUSINESS
WE HAVE HISTORICALLY LOST MONEY AND LOSSES MAY CONTINUE IN THE FUTURE
We have historically lost money. In the six months ended June 30, 2001
and year ended December 31, 2000, we sustained losses from continuing operations
of $1.1 million and $5.3 million, respectively. Future losses are likely to
occur. Accordingly, we may experience significant liquidity and cash flow
problems if we are not able to raise additional capital as needed and on
acceptable terms. No assurances can be given that we will be successful in
reaching or maintaining profitable operations.
WE WILL NEED TO RAISE ADDITIONAL CAPITAL TO FINANCE OPERATIONS
Our operations have relied almost entirely on external financing to
fund our operations. Such financing has historically come from a combination of
borrowings from and sale of common stock to third parties and funds provided by
certain officers and directors. We will need to raise additional capital to fund
our anticipated operating expenses and future expansion. Among other things,
external financing will be required to cover our operating costs. We cannot
assure you that financing whether from external sources or related parties will
be available if needed or on favorable terms. The sale of our common stock to
raise capital may cause dilution to our existing shareholders. Our inability to
obtain adequate financing will result in the need to curtail business
operations. Any of these events would be materially harmful to our business and
may result in a lower stock price.
THERE IS SUBSTANTIAL DOUBT ABOUT OUR ABILITY TO CONTINUE AS A GOING CONCERN DUE
TO RECURRING LOSSES AND WORKING CAPITAL SHORTAGES, WHICH MEANS THAT WE MAY NOT
BE ABLE TO CONTINUE OPERATIONS UNLESS WE OBTAIN ADDITIONAL FUNDING
The report of our independent accountants on our December 31, 2000
financial statements included an explanatory paragraph indicating that there is
substantial doubt about our ability to continue as a going concern due to
recurring losses and working capital shortages. Our ability to continue as a
going concern will be determined by our ability to obtain additional funding.
Our financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
WE INADVERTENTLY FAILED TO FILE POST-EFFECTIVE AMENDMENTS TO INCREASE THE NUMBER
OF REGISTERED SHARES OF COMMON STOCK AVAILABLE FOR SALE IN CONNECTION WITH TWO
EARLIER FILED REGISTRATION STATEMENTS, WHICH MAY RESULT IN LIABILITY FOR
VIOLATIONS OF SECURITIES LAWS
Celerity filed a Registration Statement on Form S-3 on April 6, 2000
and a Registration Statement on Form SB-2 on October 5, 2000. Subsequently, the
SEC declared both Registration Statements effective. The Registration Statement
on Form S-3 purported to register 2,321,511 shares of common stock on behalf of
selling shareholders. All of these shares were to be issued to the selling
shareholders upon exercise or conversion of outstanding warrants and debentures.
Due to a decline in Celerity's stock price, Celerity actually issued 19,521,126
shares of common stock upon exercise and conversion, or 17,199,615 shares of
common stock in excess of that which was registered.
The Registration Statement on Form SB-2 purported to register 4,646,548
shares of common stock on behalf of selling shareholders. Of that total,
1,131,000 shares of common stock were to be issued to selling shareholders upon
conversion of outstanding indebtedness. Due to a decline in Celerity's stock
price, Celerity actually issued 11,292,833 shares of common stock upon
conversion, or 10,432,548 shares of common stock in excess of that which was
registered.
7
Celerity believes that all of the shares issued upon exercise or
conversion have been sold in the public market. Pursuant to Rule 462 promulgated
under the Securities Act of 1933, Celerity was required to file Post-Effective
Amendments to these Registration Statements registering the additional shares of
common stock issued in excess of that which was originally registered. These
Post-Effective Amendments were to be filed prior to the sale of such shares by
the selling shareholders. Celerity's inadvertent failure to file these
Post-Effective Amendments may expose Celerity to potential liability for a
violation of Section 5 or other sections of the Securities Act. Such liability
may include rescission rights (I.E., obligating Celerity to repurchase any
shares issued in excess of that which was registered).
OUR COMMON STOCK MAY BE AFFECTED BY LIMITED TRADING VOLUME AND MAY FLUCTUATE
SIGNIFICANTLY
Prior to this offering, there has been a limited public market for our
common stock and there can be no assurance that an active trading market for our
common stock will develop. As a result, this could adversely affect our
shareholders' ability to sell our common stock in short time periods, or
possibly at all. Our common stock has experienced, and is likely to experience
in the future, significant price and volume fluctuations which could adversely
affect the market price of our common stock without regard to our operating
performance. In addition, we believe that factors such as quarterly fluctuations
in our financial results and changes in the overall economy or the condition of
the financial markets could cause the price of our common stock to fluctuate
substantially.
OUR COMMON STOCK IS DEEMED TO BE "PENNY STOCK," WHICH MAY MAKE IT MORE DIFFICULT
FOR INVESTORS TO RESELL THEIR SHARES DUE TO SUITABILITY REQUIREMENTS
Our common stock is deemed to be "penny stock" as that term is defined
in Rule 3a51-1 promulgated under the Securities Exchange Act of 1934. Penny
stocks are stock:
o With a price of less than $5.00 per share;
o That are not traded on a "recognized" national exchange;
o Whose prices are not quoted on the Nasdaq automated quotation system
(Nasdaq listed stock must still have a price of not less than $5.00
per share); or
o In issuers with net tangible assets less than $2.0 million (if the
issuer has been in continuous operation for at least three years) or
$5.0 million (if in continuous operation for less than three years),
or with average revenues of less than $6.0 million for the last
three years.
Broker/dealers dealing in penny stocks are required to provide
potential investors with a document disclosing the risks of penny stocks.
Moreover, broker/dealers are required to determine whether an investment in a
penny stock is a suitable investment for a prospective investor. These
requirements may reduce the potential market for our common stock by reducing
the number of potential investors. This may make it more difficult for investors
in our common stock to sell shares to third parties or to otherwise dispose of
them. This could cause our stock price to decline.
WE COULD FAIL TO ATTRACT OR RETAIN KEY PERSONNEL
Our success largely depends on the efforts and abilities of key
executives and consultants, including Kenneth D. Van Meter, our Chief Executive
Officer, President and Chairman of the Board. The loss of the services of Mr.
Van Meter could materially harm our business because of the cost and time
necessary to replace and train a replacement. Such a loss would also divert
management attention away from operational issues. We do not have an employment
agreement with Mr. Van Meter. We do not presently maintain a key-man life
insurance policy on Mr. Van Meter.
OUR PROJECTS ARE EXPECTED TO REQUIRE SUBSTANTIAL UP-FRONT COSTS BEFORE ANY
REVENUES WILL BE REALIZED
A significant portion of our revenue is expected to continue to be
derived from substantial long-term projects which require significant up-front
expense to us. There can be no assurance that revenues will be realized until
the projects are completed or certain significant milestones are met. Our
failure, or any failure by a third-party with which we may contract, to perform
services or deliver interactive video products on a timely basis could result in
a substantial loss to us.
We have had difficulty in meeting delivery schedules, which has
resulted in customer dissatisfaction. In addition, difficulty in completing a
project could have a material adverse effect on our reputation, business and
8
results of operations. In many instances, we are dependent on the efforts of
third parties to adequately complete our portion of a project and, even if our
digital video servers perform as required, a project may still fail due to other
components of the project supplied by third parties.
LACK OF PATENT AND COPYRIGHT PROTECTION
Although we have filed a provisional patent application with respect to
certain technology, we hold no patents and have not generally filed patent
applications. Our methods of protecting our proprietary knowledge may not afford
adequate protection. We cannot assure you that any patents applied for will be
issued, or, if issued, that such patents would provide them with meaningful
protection from competition.
RISK OF THIRD PARTY CLAIMS OF INFRINGEMENT
Technology-based industries, such as ours, are characterized by an
increasing number of patents and frequent litigation based on allegations of
patent infringement. From time to time, third parties may assert patent,
copyright and other intellectual property rights to technologies that are
important to us. While there currently are no outstanding infringement claims
pending by or against us, we cannot assure you that third parties will not
assert infringement claims against us in the future, that assertions by such
parties will not result in costly litigation, or that they will not prevail in
any such litigation. In addition, we cannot assure you that we will be able to
license any valid and infringed patents from third parties on commercially
reasonable terms or, alternatively, be able to redesign products on a
cost-effective basis to avoid infringement. Any infringement claim or other
litigation against or by us could have a material adverse effect on us.
NO ASSURANCE OF TECHNOLOGICAL SUCCESS
Our ability to commercialize our products is dependent on the
advancement of our existing technology. In order to obtain and maintain a
significant market share we will continually be required to make advances in
technology. Due to cash shortages, we did not expend any money in research and
development in 2000. We cannot assure you that our research and development
efforts will result in the development of such technology on a timely basis or
at all. Any failures in such research and development efforts could result in
significant delays in product development and have a material adverse effect on
us. We cannot assure you that we will not encounter unanticipated technological
obstacles which either delay or prevent us from completing the development of
our products.
We believe there are certain technological obstacles to be overcome in
order to develop future products. These obstacles include the lack of an
electronic data interchange server interface (used for real-time exchange of
data between servers) and enhancements in the ability to access and utilize
information stored on remote servers. In certain cases, we will be dependent
upon technological advances which must be made by third parties. We cannot
assure you that they or such third parties will not encounter technological
obstacles which either delay or prevent us from completing the development of
our future products. Such obstacles could have a material adverse effect on us.
CERTAIN OF OUR PRODUCTS AND SERVICES ARE REGULATED BY THE FEDERAL COMMUNICATIONS
COMMISSION, WHICH MAY IMPOSE BURDENSOME REGULATIONS ON US
The Federal Communications Commission and certain state agencies
regulate certain of our products and services and certain of the users of such
products and services. We are also subject to regulations applicable to
businesses generally, including regulations relating to manufacturing. In
addition, regulatory authorities in foreign countries in which we may sell our
products may impose similar or more extensive governmental regulations.
We rely upon, and contemplate that we will continue to rely upon, our
corporate partners or interactive video system sponsors to comply with
applicable regulatory requirements. We cannot assure you that such regulations
will not materially adversely affect us by jeopardizing the projects in which we
are participating, by imposing burdensome regulations on the users of our
products, by imposing sanctions that directly affect us, or otherwise. Changes
in the regulatory environment relating to the industries in which we compete
could have a material adverse effect on us. We cannot predict the effect that
future regulation or regulatory changes may have on our business.
9
WE DO NOT MAINTAIN ANY PRODUCT LIABILITY INSURANCE, WHICH MAY EXPOSE US TO THE
EXPENSE OF DEFENDING ANY LIABILITY CLAIMS
The manufacture and sale of our products entails the risk of product
liability claims. In addition, many of the telephone, cable and other large
companies with which we do or may do business may require financial assurances
of product reliability. At the present time we do not maintain product liability
insurance.
WE MAY NOT BE ABLE TO ACCESS SUFFICIENT FUNDS UNDER THE EQUITY LINE OF CREDIT
WHEN NEEDED
We are dependent on external financing to fund our operations. Our
financing needs are expected to be provided from the Equity Line of Credit, in
large part. No assurances can be given that such financing will be available in
sufficient amounts or at all when needed, in part, because the amount of
financing available will fluctuate with the price and volume of our common
stock. As the price and volume decline, then the amount of financing available
under the Equity Line of Credit will decline.
RISKS RELATED TO THIS OFFERING
FUTURE SALES BY OUR STOCKHOLDERS MAY ADVERSELY AFFECT OUR STOCK PRICE AND OUR
ABILITY TO RAISE FUNDS IN NEW STOCK OFFERINGS
Sales of our common stock in the public market following this offering
could lower the market price of our common stock. Sales may also make it more
difficult for us to sell equity securities or equity-related securities in the
future at a time and price that our management deems acceptable or at all. Of
the 67,607,657 shares of our common stock outstanding as of October 9, 2001,
43,529,154 shares are, or will be, freely tradable without restriction, unless
held by our "affiliates." The remaining 24,078,503 shares of common stock held
by existing stockholders are "restricted securities" and may be resold in the
public market only if registered or pursuant to an exemption from registration.
In addition, there are outstanding options, warrants, convertible debentures,
Series B Preferred Stock and Series C Preferred Stock, and which, upon exercise
or conversion, together with the shares of common stock to be issued under the
Equity Line of Credit, would result in the issuance of an additional 184,779,720
shares of our common stock. All of the shares underlying the Series B Preferred
Stock, Series C Preferred Stock, options, warrants and convertible debentures
may be immediately resold in the public market upon effectiveness of the
accompanying registration statement.
EXISTING SHAREHOLDERS WILL EXPERIENCE SIGNIFICANT DILUTION FROM OUR SALE OF
SHARES UNDER THE EQUITY LINE OF CREDIT
The sale of shares pursuant to the Equity Line of Credit will have a
dilutive impact on our stockholders. As a result, our net income per share could
decrease in future periods, and the market price of our common stock could
decline. In addition, the lower our stock price is the more shares of common
stock we will have to issue under the Equity Line of Credit to draw down the
full amount. If our stock price is lower, then our existing stockholders would
experience greater dilution.
THE INVESTOR UNDER THE LINE OF CREDIT WILL PAY LESS THAN THE THEN-PREVAILING
MARKET PRICE OF OUR COMMON STOCK
The common stock to be issued under the Equity Line of Credit will be
issued at an 18% discount to the average of the five lowest closing bid prices
on the Over-the-Counter Bulletin Board or other principal market on which our
common stock is traded for the ten days immediately following the notice date.
These discounted sales could cause the price of our common stock to decline.
THE SELLING STOCKHOLDERS INTEND TO SELL THEIR SHARES OF COMMON STOCK IN THE
MARKET, WHICH SALES MAY CAUSE OUR STOCK PRICE TO DECLINE
The selling stockholders intend to sell in the public market the shares
of common stock being registered in this offering. That means that up to
228,440,611 shares of common stock, the number of shares being registered in
this offering, may be sold. Such sales may cause our stock price to decline.
10
THE SIGNIFICANT DOWNWARD PRESSURE ON THE PRICE OF OUR STOCK CAUSED BY THE SALE
OF MATERIAL AMOUNTS OF COMMON STOCK UNDER THE ACCOMPANYING REGISTRATION
STATEMENT COULD ENCOURAGE SHORT SALES BY THIRD PARTIES, WHICH COULD CONTRIBUTE
TO THE FURTHER DECLINE OF OUR STOCK PRICE
The significant downward pressure on our stock price caused by the sale
of stock registered in this offering could encourage short sales by third
parties. Such short sales could place further downward pressure on our stock
price.
OUR COMMON STOCK HAS BEEN RELATIVELY THINLY TRADED AND WE CANNOT PREDICT THE
EXTENT TO WHICH A TRADING MARKET WILL DEVELOP
Before this offering, our common stock has traded on the
Over-the-Counter Bulletin Board. Our common stock is thinly traded compared to
larger more widely known companies in our industry. Thinly traded common stock
can be more volatile than common stock trading in an active public market. We
cannot predict the extent to which an active public market for the common stock
will develop or be sustained after this offering.
THE PRICE YOU PAY IN THIS OFFERING WILL FLUCTUATE AND MAY BE HIGHER OR LOWER
THAN THE PRICES PAID BY OTHER PEOPLE PARTICIPATING IN THIS OFFERING
The price in this offering will fluctuate based on the prevailing
market price of the common stock on the Over-the-Counter Bulletin Board.
Accordingly, the price you pay in this offering may be higher or lower than the
prices paid by other people participating in this offering.
THE ISSUANCE OF SHARES OF COMMON STOCK UNDER THIS OFFERING COULD RESULT IN A
CHANGE OF CONTROL
We are registering 228,440,611 shares of common stock in this offering.
These shares represent over 91% of our authorized capital stock, and we
anticipate all such shares will be sold in this offering. If all or a
significant block of these shares are held by one or more shareholders working
together, then such shareholder or shareholders would have enough shares to
assume control of Celerity by electing its or their own directors.
WE MAY NOT HAVE ENOUGH SHARES OF COMMON STOCK AVAILABLE TO ISSUE IN CONNECTION
WITH THE EXERCISE OR CONVERSION OF OUTSTANDING OPTIONS, WARRANTS, CONVERTIBLE
DEBENTURES AND PREFERRED STOCK, WHICH MEANS THAT CELERITY COULD BE LIABLE TO THE
HOLDERS OF SUCH SECURITIES FOR FAILING TO MEET ITS OBLIGATIONS WHEN REQUIRED
We have 67,607,657 shares of common stock outstanding, together with
outstanding options, warrants, debentures and preferred stock that are
exercisable or convertible into 184,779,720 shares of common stock. On a fully
diluted basis, Celerity would have 252,387,377 shares of common stock
outstanding and only 250,000,000 shares of common stock authorized in its
Certificate of Incorporation. If all outstanding options, warrants, debentures
and preferred stock are converted or exercised into shares of common stock, then
Celerity would not have enough shares of authorized common stock to meet its
obligations. Celerity could be liable for damages resulting from its failure to
have enough shares of authorized common stock to issue to the holders of
convertible or exercisable securities when required.
11
FORWARD-LOOKING STATEMENTS
Information included or incorporated by reference in this prospectus
may contain forward-looking statements. This information may involve known and
unknown risks, uncertainties and other factors which may cause our actual
results, performance or achievements to be materially different from the future
results, performance or achievements expressed or implied by any forward-looking
statements. Forward-looking statements, which involve assumptions and describe
our future plans, strategies and expectations, are generally identifiable by use
of the words "may," "will," "should," "expect," "anticipate," "estimate,"
"believe," "intend" or "project" or the negative of these words or other
variations on these words or comparable terminology.
This prospectus contains forward-looking statements, including
statements regarding, among other things, (a) our projected sales and
profitability, (b) our growth strategies, (c) anticipated trends in our
industry, (d) our future financing plans and (e) our anticipated needs for
working capital. These statements may be found under "Management's Discussion
and Analysis or Plan of Operations" and "Business," as well as in this
prospectus generally. Actual events or results may differ materially from those
discussed in forward-looking statements as a result of various factors,
including, without limitation, the risks outlined under "Risk Factors" and
matters described in this prospectus generally. In light of these risks and
uncertainties, there can be no assurance that the forward-looking statements
contained in this prospectus will in fact occur.
12
SELLING STOCKHOLDERS
The following table presents information regarding the selling
stockholders. Pursuant to the Equity Line of Credit, Cornell Capital Partners,
L.P. has agreed to purchase up to $10.0 million of our common stock. None of the
selling stockholders have held a position or office, or had any other material
relationship, with us, except as follows:
o Cornell Capital Partners, L.P. is the investor under the Equity Line
of Credit. All investment decisions of Cornell Capital Partners are
made by its general partner, Yorkville Advisors, LLC. Mark Angelo,
the managing member of Yorkville Advisors, LLC, makes the investment
decisions on behalf of Yorkville Advisors.
o Kenneth D. Van Meter is our Chairman of the Board of Directors,
President and Chief Executive Officer.
o Harb, Souther & Snyder is a consultant of ours. Steve Harb, Ed
Souther, Sally Snyder and David Leigh are employees of the Harb,
Souther & Snyder.
o Messrs. Broussard, Brumgard, Chambers, Pierce, Longnecker, Boyd,
Russell, Krueger, Braunstein and Greenhouse are or were employees of
ours.
o Pursuant to a contract, Artesian Direct Holding Corporation agreed
to purchase $10 million of products from Celerity or to provide $10
million in financing. The shares held by Artesian Direct were issued
in exchange for Artesian Direct's commitment. Ed Kidston, a member
of our Board of Directors, owns 30% of the outstanding capital stock
of Artesian Direct.
o Messrs. Van Meter, Scruggs, Hultquist, Thompson and Kidston are
members of our Board of Directors.
o Internet Finance International Corporation is engaged as a
consultant of ours. Pursuant to a contract, Internet Finance is
assisting us in obtaining financing. For its services, Internet
Finance received warrants to purchase 500,000 shares of our common
stock. One-half of these warrants had an exercise price of $0.15 per
share and the other one-half had an exercise price of $0.25 per
share. In addition, we are obligated to issue to Internet Finance
warrants to purchase additional shares of common stock if we receive
financing arranged by Internet Finance. For each $500,000 of capital
received by Celerity, Internet Finance will receive warrants to
purchase 250,000 shares of common stock at $0.15 per share. Celerity
is registering in this offering 1,500,000 shares of common stock
underlying warrants to be issued in the future under this contract.
The table follows:
PERCENTAGE OF PERCENTAGE OF
OUTSTANDING OUTSTANDING
SHARES SHARES SHARES TO BE SHARES
BENEFICIALLY BENEFICIALLY ACQUIRED UNDER SHARES TO BE BENEFICIALLY
SELLING OWNED BEFORE OWNED BEFORE THE LINE OF SOLD IN THE OWNED AFTER
STOCKHOLDER OFFERING(1) OFFERING(2) CREDIT OFFERING(1) OFFERING
---------------------------- ------------------- ----------------- ------------------ ------------------ -----------------
Ackerman, Harvey 476,190 * 0 476,190 0.0%
Anderson, Gary 952,381 1.39% 0 952,381 0.0%
Angelo, Mark 460,000 * 0 460,000 0.0%
Anoff, Robert 621,118 * 0 621,118 0.0%
Arab Commerce Bank 1,904,762 2.74% 0 1,904,762 0.0%
Artesian Direct Holdings
Corporation 2,400,000 3.55% 0 2,400,000 0.0%
Beadle, Robert 190,476 * 0 190,476 0.0%
Berens, Mark 476,190 * 0 476,190 0.0%
Bob-Mor, Inc. 1,660,000 2.40% 0 1,660,000 0.0%
Borne, Timothy 2,904,762 4.12% 0 2,904,762 0.0%
13
PERCENTAGE OF PERCENTAGE OF
OUTSTANDING OUTSTANDING
SHARES SHARES SHARES TO BE SHARES
BENEFICIALLY BENEFICIALLY ACQUIRED UNDER SHARES TO BE BENEFICIALLY
SELLING OWNED BEFORE OWNED BEFORE THE LINE OF SOLD IN THE OWNED AFTER
STOCKHOLDER OFFERING(1) OFFERING(2) CREDIT OFFERING(1) OFFERING
---------------------------- ------------------- ----------------- ------------------ ------------------ -----------------
Boyd, Christopher 40,237 * 0 40,237 0.0%
Braunstein, Mark 38,081 * 0 38,081 0.0%
Breeden, Alvin 476,190 * 0 476,190 0.0%
Broussard, Roger 158,194 * 0 158,194 0.0%
Brumgard, David 114,235 * 0 114,235 0.0%
Bumb, Walter 440,000 * 0 440,000 0.0%
Canfield, Marcus 5,146 * 0 5,146 0.0%
Celerity Employees Under
Payroll Share Payment Program 25,200 * 0 25,200 0.0%
Chambers, William 74,120 * 0 74,120 0.0%
Chang, Chien Chum 2,394,617 3.42% 0 2,394,617 0.0%
Chau, Sui Wa 3,726,708 5.22% 0 3,726,708 0.0%
Chen, Peter Che Nan 3,726,708 5.22% 0 3,726,708 0.0%
Collins, Frank 372,671 * 0 372,671 0.0%
Conrad, Dr. Rodney 125,000 * 0 125,000 0.0%
Cornell Capital Partners,
L.P. 14,034,873 17.19% 55,555,556(3) 69,590,429 0.0%
Coval, Howard 380,952 * 0 380,952 0.0%
Denish, Adam 190,476 * 0 190,476 0.0%
Denish, Carole 666,667 * 0 666,667 0.0%
Dhanda, Dr. Anand 2,242,236 3.21% 0 2,242,236 0.0%
DKMT Co. 4,000,000 5.58% 0 4,000,000 0.0%
Eicke, Gerald 638,923 * 0 638,923 0.0%
Elias, Francis 952,381 1.39% 0 952,381 0.0%
Farrell, Robert 810,000 1.18% 0 810,000 0.0%
Faucher, Mike & Vicki 250,000 * 0 250,000 0.0%
Feldman, Jeffrey 285,714 * 0 285,714 0.0%
Fussner, Ken 750,000 1.10% 0 750,000 0.0%
Fussner, Paul 750,000 1.10% 0 750,000 0.0%
Fussner, William 300,000 * 0 300,000 0.0%
Gilliam, Alice 5,982 * 0 5,982 0.0%
Greenhouse, Donald 86,952 * 0 86,952 0.0%
Habers, George 285,714 * 0 285,714 0.0%
Haines, Carole 300,000 * 0 300,000 0.0%
Hanse, Randal 476,190 * 0 476,190 0.0%
Harb, Souther & Snyder 600,000 * 0 600,000 0.0%
Harb, Steve 7,534 * 0 7,534 0.0%
Hodge, Keith 9,580 * 0 9,580 0.0%
Holland, Gerald 1,904,762 2.74% 0 1,904,762 0.0%
Hultquist, David 1,832,146 2.66% 0 1,832,146 0.0%
Hungerford, David 993,789 1.45% 0 993,789 0.0%
Huntley, David 250,000 * 0 250,000 0.0%
Huntley, Debbie 250,000 * 0 250,000 0.0%
Illinois Holding Companies 1,303,775 1.89% 0 1,303,775 0.0%
Internet Finance
International Corporation 2,000,000 2.9% 0 2,000,000 0.0%
Janish, Anthony G. 190,476 * 0 190,476 0.0%
14
PERCENTAGE OF PERCENTAGE OF
OUTSTANDING OUTSTANDING
SHARES SHARES SHARES TO BE SHARES
BENEFICIALLY BENEFICIALLY ACQUIRED UNDER SHARES TO BE BENEFICIALLY
SELLING OWNED BEFORE OWNED BEFORE THE LINE OF SOLD IN THE OWNED AFTER
STOCKHOLDER OFFERING(1) OFFERING(2) CREDIT OFFERING(1) OFFERING
---------------------------- ------------------- ----------------- ------------------ ------------------ -----------------
Jessen, Dr. Michael 3,596,688 5.05% 0 3,596,688 0.0%
Jinks, Daniel 125,000 * 0 125,000 0.0%
Jinnah, Rayzah 476,190 * 0 476,190 0.0%
Jinnah, Riyaz 1,144,928 1.66% 0 1,144,928 0.0%
JM Consulting Management, Inc. 380,952 * 0 380,952 0.0%
Kandell, Robert 372,671 * 0 372,671 0.0%
Kaplan, Michael 400,000 * 0 400,000 0.0%
Kelly, Thomas 800,000 1.17% 0 800,000 0.0%
Kesselbrenner, Michael 240,000 * 0 240,000 0.0%
Kessellbrenner, Doree 761,905 1.11% 0 761,905 0.0%
Keyway Holdings Co. 2,484,472 3.54% 0 2,484,472 0.0%
Kidston, Ed 4,786,539 6.76% 0 4,786,539 0.0%
Kitchell, Gary 372,671 * 0 372,671 0.0%
Korn, Edward 250,000 * 0 250,000 0.0%
Krueger, Patrice 9,856 * 0 9,856 0.0%
Lacey, Elizabeth 74,000 * 0 74,000 0.0%
Lai, Kwok Leung 2,484,472 3.54% 0 2,484,472 0.0%
Larson, Frederick 476,190 * 0 476,190 0.0%
Larson, Robert H. 190,476 * 0 190,476 0.0%
Leigh, David 23,331 * 0 23,331 0.0%
Li, Dan 2,484,472 3.54% 0 2,484,472 0.0%
Longnecker, Cabot 24,021 * 0 24,021 0.0%
Lu, Zhongwei 1,242,236 1.80% 0 1,242,236 0.0%
Mantooth, Sophie 44,440 * 0 44,440 0.0%
Marinello, Salvatore 324,224 * 0 324,224 0.0%
Martin, John 3,815,735 5.34% 0 3,815,735 0.0%
Mayblum, Adam 300,000 * 0 300,000 0.0%
McCormick, Wayne 2,400,000 3.43% 0 2,400,000 0.0%
McDonnell, George 1,200,828 1.74% 0 1,200,828 0.0%
Miller, David 4,146,998 5.78% 0 4,146,998 0.0%
Miller, William and Joanne 476,190 * 0 476,190 0.0%
Misiak, Mary Ellen 7,964,286 10.54% 0 7,964,286 0.0%
Moderhack, Donald 190,476 * 0 190,476 0.0%
Morrison, James 476,190 * 0 476,190 0.0%
Murphy, William 9,246,377 12.03% 0 9,246,377 0.0%
MYOB Investments 4,436,853 6.16% 0 4,436,853 0.0%
Northrup, Bill 300,000 * 0 300,000 0.0%
Nothdurft, Mike 476,190 * 0 476,190 0.0%
Peruski, Donald 3,073 * 0 3,073 0.0%
Pierce, Thomas 36,820 * 0 36,820 0.0%
Plender, Dwayne 476,190 * 0 476,190 0.0%
Portch, Stephen 60,952 * 0 60,952 0.0%
Price, Christopher 200,000 * 0 200,000 0.0%
Rachau, George 571,429 * 0 571,429 0.0%
Ratliff, James 1,649,275 2.38% 0 1,649,275 0.0%
15
PERCENTAGE OF PERCENTAGE OF
OUTSTANDING OUTSTANDING
SHARES SHARES SHARES TO BE SHARES
BENEFICIALLY BENEFICIALLY ACQUIRED UNDER SHARES TO BE BENEFICIALLY
SELLING OWNED BEFORE OWNED BEFORE THE LINE OF SOLD IN THE OWNED AFTER
STOCKHOLDER OFFERING(1) OFFERING(2) CREDIT OFFERING(1) OFFERING
---------------------------- ------------------- ----------------- ------------------ ------------------ -----------------
RNI Direct 10,054,428 12.94% 0 10,054,428 0.0%
Robbins, Herbert 1,649,275 2.38% 0 1,649,275 0.0%
Rumge, Ronald 200,000 * 0 200,000 0.0%
Russell, Scott 20,899 * 0 20,899 0.0%
Ryneveld, Robert 952,381 1.39% 0 952,381 0.0%
Saparito, Robert 1,066,667 1.55% 0 1,066,667 0.0%
Schaeffer, Stephen 600,000 * 0 600,000 0.0%
Schwartz, Mark 400,000 * 0 400,000 0.0%
Scruggs, Fenton 553,105 * 0 553,105 0.0%
Scruggs, Jr., Fenton 44,440 * 0 44,440 0.0%
Scruggs, Stephanie 44,440 * 0 44,440 0.0%
Severance, Steve 701,118 1.03% 0 701,118 0.0%
Shan, Lam King 3,726,708 5.22% 0 3,726,708 0.0%
Silverstein, Robert 285,714 * 0 285,714 0.0%
Simpson, Gerald 7,341,615 9.79% 0 7,341,615 0.0%
Skillman, Dean 2,200,000 3.20% 0 2,200,000 0.0%
Snyder, Sally 224,283 * 0 224,283 0.0%
Soto, Robert 300,000 * 0 300,000 0.0%
Souther, Ed 897,128 1.33% 0 897,128 0.0%
Strauss, Marvin 372,671 * 0 372,671 0.0%
Szlaius, William 285,714 * 0 285,714 0.0%
Texas International
Investments 476,190 * 0 476,190 0.0%
Thompson, Bruce 3,169,466 4.48% 0 3,169,466 0.0%
TKM Partnership 2,000,000 2.87% 0 2,000,000 0.0%
Turner, James 5,000 * 0 5,000 0.0%
Van Meter, Adam 74,000 * 0 74,000 0.0%
Van Meter, Kenneth D. 2,917,013 4.17% 0 2,917,013 0.0%
Van Meter, Ryan 74,000 * 0 74,000 0.0%
Viamax Trading Company, Ltd. 761,905 1.11% 0 761,905 0.0%
Ward, William 10,526 * 0 10,526 0.0%
Wasilesku, Jordanna 250,000 * 0 250,000 0.0%
Wasserman, Alan 476,190 * 0 476,190 0.0%
Waters, Jerome 190,476 * 0 190,476 0.0%
Welch, Paul 476,190 * 0 476,190 0.0%
West, Glenn 130,953 * 0 130,953 0.0%
Williams, Alfred 190,476 * 0 190,476 0.0%
Williams, Donna 476,190 * 0 476,190 0.0%
Wojciak, Paul 476,190 * 0 476,190 0.0%
Yorkville Advisors, LLC 6,000,000 8.15% 0 6,000,000 0.0%
Zhu, Hong 300,000 * 0 300,000 0.0%
-------------------
* Less than 1%.
(1) The shares represented in this column represent outstanding shares of
common stock, as well as shares of common stock that may be obtained
upon conversion or exercise of outstanding options, warrants,
convertible debentures and preferred stock.
16
(2) Percentage of outstanding shares is based on 67,607,657 shares of
common stock outstanding as of October 9, 2001, together with shares
deemed beneficially owned by each such shareholder. Beneficial
ownership is determined in accordance with the rules of the Securities
and Exchange Commission and generally includes voting or investment
power with respect to securities. Shares of common stock that may be
obtained within 60 days of October 9, 2001 are deemed to be
beneficially owned by the person holding such securities that are
convertible or exchangeable into shares of common stock for the purpose
of computing the percentage of ownership of such person, but are not
treated as outstanding for the purpose of computing the percentage
ownership of any other person.
(3) The number of shares of common stock available under the Equity Line of
Credit may be increased by any unused shares of common stock not used
upon the conversion of debentures held by other selling shareholders.
17
USE OF PROCEEDS
This prospectus relates to shares of our common stock that may be
offered and sold from time to time by certain selling stockholders. There will
be no proceeds to us from the sale of shares of common stock in this offering.
However, we will receive the proceeds from the sale of shares of common stock to
Cornell Capital Partners, L.P. under the Equity Line of Credit. The purchase
price of the shares purchased under the Equity Line of Credit will be equal to
82% of the average of the five lowest closing bid prices on the Over-the-Counter
Bulletin Board or other principal market on which our common stock is traded for
the ten days immediately following the notice date.
For illustrative purposes, we have set forth below its intended use of
proceeds for the range of net proceeds indicated below to be received under the
Equity Line of Credit. The table assumes estimated offering expenses of $60,000
and consulting fees of 10.0% of the gross proceeds raised under the Equity Line
of Credit have been deducted from the gross proceeds.
NET PROCEEDS $2.5 MILLION $5.0 MILLION $7.5 MILLION $10.0 MILLION
-------------------------------------------------------------------------------------------------------------------
USE OF PROCEEDS:
-------------------------------------------------------------------------------------------------------------------
Repayment of Debt $150,000 $150,000 $150,000 $150,000
Engineering Development $200,000 $300,000 $400,000 $500,000
Capital Investment in Multiple Dwelling Units* $1,500,000 $3,225,000 $4,825,000 $6,850,000
General Working Capital $650,000 $1,325,000 $2,125,000 $2,500,000
-------------------
* This represents the investment expected to be needed by Celerity to
purchase inventory and to install its products in multiple dwelling
units.
18
DILUTION
Since this offering is being made solely by the selling stockholders
and none of the proceeds will be paid to us, our net tangible book value will be
unaffected by this offering. Our net tangible book value, however, will be
impacted by the common stock to be issued under the Equity Line of Credit.
Our net tangible book value as of June 30, 2001 was ($2,316,833) or
($0.047) per share of common stock. Net tangible book value is determined by
dividing our tangible book value (total tangible assets less total liabilities)
by the number of outstanding shares of our common stock.
For example, if we assume that we had issued 125,000,000 shares of
common stock under the Equity Line of Credit at an assumed offering price of
$0.08 per share, less consulting fees of $1,000,000 and $60,000 of other
offering expenses, our net tangible book value as of June 30, 2001 would have
been $6,623,167 or $0.038 per share. This represents an immediate increase in
net tangible book value to existing shareholders of $0.085 per share and an
immediate dilution to new shareholders of $0.042 per share, or 52.5%. The
following table illustrates the per share dilution:
Assumed public offering price per share $0.080
Net tangible book value per share before this offering $(0.047)
Increase attributable to new investors 0.085
-----------
Net tangible book value per share after this offering 0.038
----------
Dilution per share to new shareholders $0.042
==========
The offering price of our common stock under the Equity Line of Credit
is based on 82% of the average of the 3 lowest closing bid prices on the
Over-the-Counter Bulletin Board or other principal market on which our common
stock is traded for the 5 days immediately following the notice date. In order
to give prospective investors an idea of the dilution per share they may
experience, we have prepared the following table showing the dilution per share
at various assumed offering prices. Celerity is registering 78,699,038 shares of
common stock under the Equity Line of Credit and the convertible debentures.
Accordingly, Celerity would need to register additional shares of common stock
in order to fully utilize the $10.0 million available under the Equity Line of
Credit at the prices set forth below.
ASSUMED NO. OF SHARES TO BE DILUTION PER SHARE TO
OFFERING PRICE ISSUED NEW INVESTORS
----------------------------------------------------- --------------------------
$0.08 125,000,000 $0.042
$0.06 166,666,667 $0.029
$0.04 250,000,000 $0.018
$0.02 500,000,000 $0.012
19
CAPITALIZATION
The following table sets forth the total capitalization of Celerity as
of June 30, 2001.
JUNE 30, 2001
ACTUAL
-----------------
Long-term Debt, Less Current Portion $1,027,835
-----------------
Series A convertible preferred stock,
$0.01 par value; 50 shares authorized;
0 shares issued and outstanding at
June 30, 2001
Series B preferred stock, $0.01 par value;
100 shares authorized and 100 issued 144,334
and outstanding at June 30, 2001
Stockholders' deficit:
Common stock, $0.001 par value; 49,858
50,000,000 shares authorized
and 49,858,464 issued and 49,521,100
outstanding at June 30, 2001
Additional paid-in capital 29,991,258
Equity placement fee (1,363,975)
Treasury stock, at cost, 337,364 shares (227,500)
Accumulated Deficit (30,766,474)
--------------
Total stockholders' deficit (2,172,499)
--------------
Total capitalization $(1,288,998)
==============
20
EQUITY LINE OF CREDIT
SUMMARY. On June 14, 2001, we entered into an Equity Line of Credit
("EQUITY LINE OF CREDIT") with Cornell Capital Partners, L.P. (the "INVESTOR").
Pursuant to the Equity Line of Credit, we may, at our discretion, periodically
sell to the Investor shares of common stock for a total purchase price of up to
$10.0 million. For each share of common stock purchased under the Equity Line of
Credit, the Investor will pay 82% of the average of the 3 lowest closing bid
prices on the Over-the-Counter Bulletin Board or other principal market on which
our common stock is traded for the 5 days immediately following the notice date.
The Investor is a private limited partnership whose business operations are
conducted through its general partner, Yorkville Advisors, LLC. Further,
Yorkville Advisors is a consultant to us and will be paid a consulting fee of
10% of each advance under the Equity Line of Credit. In addition, Yorkville
Advisors received warrants to purchase 3,500,000 shares of common stock at an
exercise price of $0.10 per share. The effectiveness of the sale of the shares
under the Equity Line of Credit is conditioned upon us registering the shares of
common stock with the Securities and Exchange Commission. The costs associated
with this registration will be borne by us.
EQUITY LINE OF CREDIT EXPLAINED. Pursuant to the Equity Line of Credit,
we may periodically sell shares of common stock to Cornell Capital Partners,
L.P. to raise capital to fund our working capital needs. The periodic sale of
shares is known as an advance. We may request an advance every 10 trading days.
A closing will be held 7 trading days after such written notice at which time we
will deliver shares of common stock and Cornell Capital Partners, L.P. will pay
the advance amount.
We may request advances under the Equity Line of Credit once the
underlying shares are registered with the Securities and Exchange Commission.
Thereafter, we may continue to request advances until the Investor has advanced
$10.0 million or June 14, 2003, whichever occurs first.
The amount of each advance is subject to a maximum advance amount based
on an average daily volume of our common stock. The maximum amount of each
advance is equal to 75% of the average daily volume of our common stock for the
40 trading days prior to the date of an advance multiplied by 82% of the average
of the 3 lowest closing bid prices of our common stock for the 5 trading days
immediately following the notice date of an advance.
By way of illustration only, if we had requested an advance on October
1, 2001, then the 40-day average volume would have been approximately 590,557
and the average of the 3 lowest closing bid prices of our common stock for the 5
trading days immediately following October 1, 2001 would have been $0.07.
Accordingly, the maximum advance amount would have been $25,423 (I.E., 75%,
multiplied by 590,557, multiplied by $0.07 multiplied by 82%).
We cannot predict the actual number of shares of common stock that will
be issued pursuant to the Equity Line of Credit, in part, because the purchase
price of the shares will fluctuate based on prevailing market conditions and we
have not determined the total amount of advances we intend to draw. Nonetheless,
we can estimate the number of shares of our common stock that will be issued
using certain assumptions. Assuming we drew down the entire $10.0 million
available under the Equity Line of Credit in a single advance (which is not
permitted under the terms of the Equity Line of Credit) and the purchase price
was equal to $0.064 per share, then we would issue 156,250,000 shares of our
common stock to Cornell Capital Partners, L.P. These shares would represent
69.8% of our outstanding common stock upon issuance. Celerity is registering
164,314,919 shares of common stock for the sale under the Equity Line of Credit
and the conversion of debentures. Accordingly, Celerity would need to register
additional shares of common stock in order to fully utilize the $10 million
available under the Equity Line of Credit at the prices set forth below.
You should be aware that there is an inverse relationship between our
stock price and the number of shares to be issued under the Equity Line of
Credit. That is, as our stock price declines, we would be required to issue a
greater number of shares under the Equity Line of Credit for a given advance.
This inverse relationship is demonstrated by the following table, which shows
the number of shares to be issued under the Equity Line of Credit at a recent
price of $0.10 per share and 25%, 50% and 75% discounts to the recent price.
This table does not take into account any shares of our common stock that would
be issued upon conversion of the Series B Preferred Stock, Series C Preferred
Stock, options, or warrants or the issuance of our common stock for outstanding
subscriptions.
21
Purchase Price: $0.025 $0.050 $0.075 $0.100
No. of Shares(1): 400,000,000 200,000,000 133,333,333 100,000,000
Total Outstanding(2): 467,607,657 267,607,657 200,940,990 167,607,657
Percent Outstanding(3): 85.5% 74.7% 66.4% 59.7%
-------------------
(1) Represents the number of shares of common stock to be issued to Cornell
Capital Partners, L.P. at the prices set forth in the table.
(2) Represents the total number of shares of common stock outstanding after
the issuance of the shares to Cornell Capital Partners, L.P.
(3) Represents the shares of common stock to be issued as a percentage of
the total number shares outstanding.
In addition to showing the inverse relationship, the above table also
shows that the issuance of shares under the Equity Line of Credit may result in
a change of control. That is, between 100,000,000 and 400,000,000 shares of
stock could be issued under the Equity Line of Credit. If all or a significant
block of these shares are held by one or more shareholders working together,
then such shareholder or shareholders would have enough shares to assume control
of Celerity by electing its or their own directors. Upon a change of control,
all outstanding options under our stock option plans would immediately vest.
All proceeds used under the Equity Line of Credit will be used for
general working capital purposes. We cannot predict the total amount of proceeds
to be raised in this transaction, in part, because we have not determined the
total amount of the advances we intend to draw. However, we expect to incur
expenses of approximately $60,000 consisting primarily of professional fees
incurred in connection with this registration. In addition, we are obligated to
pay to the Consultant a cash fee equal to 10.0% of each advance.
In connection with the Equity Line of Credit, we entered into a
Consulting Services Agreement with the general partner of the Investor,
Yorkville Advisors, LLC (the "CONSULTANT"). Under this agreement, the Consultant
will provide advising services relating to our financial status and capital
structure. For these services, we will pay the Consultant a cash consulting fee
equal to 10.0% of each advance under the Equity Line of Credit. In addition, the
Consultant received warrants to purchase 3,500,000 shares of common stock for an
exercise price of $0.10 per share.
22
PLAN OF DISTRIBUTION
The selling stockholders have advised us that the sale or distribution
of our common stock owned by the selling stockholders may be effected directly
to purchasers by the selling stockholders or by pledgees, donees, transferees or
other successors in interest, as principals or through one or more underwriters,
brokers, dealers or agents from time to time in one or more transactions (which
may involve crosses or block transactions) (i) on the over-the-counter market or
in any other market on which the price of our shares of common stock are quoted
or (ii) in transactions otherwise than on the over-the-counter market or in any
other market on which the price of our shares of common stock are quoted. Any of
such transactions may be effected at market prices prevailing at the time of
sale, at prices related to such prevailing market prices, at varying prices
determined at the time of sale or at negotiated or fixed prices, in each case as
determined by the selling stockholders or by agreement between the selling
stockholders and underwriters, brokers, dealers or agents, or purchasers. If the
selling stockholders effect such transactions by selling their shares of our
common stock to or through underwriters, brokers, dealers or agents, such
underwriters, brokers, dealers or agents may receive compensation in the form of
discounts, concessions or commissions from the selling stockholders or
commissions from purchasers of common stock for whom they may act as agent
(which discounts, concessions or commissions as to particular underwriters,
brokers, dealers or agents may be in excess of those customary in the types of
transactions involved). The selling stockholders and any brokers, dealers or
agents that participate in the distribution of the common stock may be deemed to
be underwriters, and any profit on the sale of common stock by them and any
discounts, concessions or commissions received by any such underwriters,
brokers, dealers or agents may be deemed to be underwriting discounts and
commissions under the Securities Act.
Cornell Capital Partners, L.P. is an "underwriter" within the meaning
of the Securities Act of 1933 in connection with the sale of common stock under
the Equity Line of Credit agreement. Cornell Capital Partners, L.P. will pay us
82% of the average of the five lowest closing bid prices on the Over-the-Counter
Bulletin Board or other principal trading market on which our common stock is
traded for the 5 days immediately following the notice date. The 18% discount on
the purchase of the common stock to be received by Cornell Capital Partners,
L.P. will be an underwriting discount. We retained Yorkville Advisors, LLC as
our consultant in connection with the Equity Line of Credit. For its services,
Yorkville Advisors, LLC will be paid a consulting fee consisting of a cash
payment of 10.0% of the gross proceeds raised in the Equity Line of Credit.
Under the securities laws of certain states, the shares of common stock
may be sold in such states only through registered or licensed brokers or
dealers. In addition, in certain states the shares of common stock may not be
sold unless the shares have been registered or qualified for sale in such state
or an exemption from registration or qualification is available and is complied
with.
We will pay all the expenses incident to the registration, offering and
sale of the shares of common stock to the public hereunder other than
commissions, fees and discounts of underwriters, brokers, dealers and agents. We
have agreed to indemnify the selling stockholders and their controlling persons
against certain liabilities, including liabilities under the Securities Act. We
estimate that the expenses of the offering to be borne by us will be
approximately $60,000 as well as consulting fees of 10.0% of the gross proceeds
received under the Equity Line of Credit. We will not receive any proceeds from
the sale of any of the shares of common stock by the selling stockholders. We
will, however, receive proceeds from the sale of common stock under the Equity
Line of Credit.
The selling stockholders should be aware that the anti-manipulation
provisions of Regulation M under the Exchange Act will apply to purchases and
sales of shares of common stock by the selling stockholders, and that there are
restrictions on market-making activities by persons engaged in the distribution
of the shares. Under Regulation M, the selling shareholders or their agents may
not bid for, purchase, or attempt to induce any person to bid for or purchase,
shares of our common stock of Celerity while such selling shareholders are
distributing shares covered by this prospectus. Accordingly, except as noted
below, the selling shareholders are not permitted to cover short sales by
purchasing shares while the distribution is taking place. Cornell Capital
Partners can cover any short positions only with shares received from us under
the Equity Line of Credit. The selling stockholders are advised that if a
particular offer of common stock is to be made on terms constituting a material
change from the information set forth above with respect to the Plan of
Distribution, then to the extent required, a post-effective amendment to the
accompanying registration statement must be filed with the Securities and
Exchange Commission.
23
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
THE FOLLOWING INFORMATION SHOULD BE READ IN CONJUNCTION WITH THE
CONSOLIDATED FINANCIAL STATEMENTS OF CELERITY AND THE NOTES THERETO APPEARING
ELSEWHERE IN THIS FILING. STATEMENTS IN THIS MANAGEMENT'S DISCUSSION AND
ANALYSIS OR PLAN OF OPERATION AND ELSEWHERE IN THIS PROSPECTUS THAT ARE NOT
STATEMENTS OF HISTORICAL OR CURRENT FACT CONSTITUTE "FORWARD-LOOKING
STATEMENTS."
OVERVIEW
Prior to 1998, our major activity was selling digital video servers in
the interactive video services market. All sales were in Korea, Israel, Taiwan
and China. However, beginning in 1998, we focused our sales efforts in North
America, and developed and sold the first production units of a new digital set
top box, the T 6000.
We have continued to focus most of our development and production
efforts during the six months ended June 30, 2001 on our T 6000 product. In
addition, we are seeking new projects using our digital video servers, which
could be deployed with the T 6000 or other compatible set top boxes. We have
produced our initial trial run of the T 6000 set top boxes, which were
manufactured by Taylor-White, LLC, of Greeneville, Tennessee. In December, 1999,
we entered into a manufacturing agreement with Global PMX Company, Limited,
which was terminated by us in November 2000. We then entered into a
manufacturing agreement with Nextek, Inc. under which all T 6000 digital set top
box manufacturing is now being done in their plant in Madison, AL.
Management has also focused on attempting to obtain the necessary
capital to maintain our operations. We are continuing to seek to arrange
financing, including possible strategic investment opportunities or
opportunities to sell some or all of our assets and business, while continuing
to pursue sales opportunities. We have narrowed our sales efforts to those
which, we believe have the best chance of closing in the near term. We continue
to encounter a longer and more complex sales cycle.
We had no revenues in 2000. We had one interactive video customer that
represented 50% of our revenues in 1999. Export sales represented 35% of
revenues for 1999.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2001 COMPARED TO THREE MONTHS ENDED JUNE 30, 2000
REVENUES. We had no revenues for the quarters ended June 30, 2001 and
2000. The lack of interactive video sales is a result of the constrained sales
and marketing activities caused by our cash shortage and delays associated with
the production of the T 6000 set top box.
COSTS OF REVENUES. Costs of revenues were $-0- in the second quarter of
2001, as compared to $685,313 in 2000. Costs of revenues in 2000 were related to
an increase in inventory obsolescence. During the second quarter of 2000, we
reached an agreement with nCUBE Corporation under which nCUBE will manufacture
Celerity's updated version of our digital video server. This updated version
rendered obsolete portions of the raw material inventory related to the former
versions of the digital video servers.
OPERATING EXPENSES. Operating expenses for the three months ending June
30, 2001 were $688,354 as compared to $945,119 for the same period in 2000, or a
decrease of $256,765. This decrease includes a reduction in legal and
professional fees of approximately $306,000 in the second quarter of 2001 from
the second quarter of 2000 primarily from lower consulting expenses incurred to
assist with investor relations and investment banking. Compensation expense was
down approximately $104,000 in the current quarter compared to the same period
in 2000. These decreases were partially offset by increases in consulting
expense incurred in the development of an updated version of the T 6000 set top
box and by increased contract labor costs incurred for the software to be used
in our interactive digital video system.
INTEREST EXPENSE. Interest expense in the second quarter of 2001 was
$160,197 as compared to $572,010 the first quarter of 2000. Of these amounts,
$43,933 and $530,033 in 2001 and 2000, respectively, are non-cash expenses
related to the beneficial conversion features of certain debentures and account
for a significant portion of the reduction between the two periods. In November
2000, the Emerging Issues Task Force of the Financial Accounting Standards Board
reached a consensus that the discount resulting from recording a beneficial
conversion feature is to amortized from the date of issuance to the stated
redemption date of the convertible instrument, regardless of when the earliest
conversion date occurs. As a result, the beneficial conversion feature of the
24
convertible debentures issued after November 2000 are being amortized over the
life of the debentures, in most cases 60 months, versus an approximately 3 month
period generally used prior to the issuance of this pronouncement.
LOSS FROM CONTINUING OPERATIONS. As a result of the above factors, net
loss from continuing operations for the quarter ended June 30, 2001, was
$340,550 as compared to $2,194,547 for the same period in 2000.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING METHOD. Effective June 30,
2001, Celerity adopted the provisions of EITF 00-19, "Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a Company's Own
Stock". This issue provides that warrants to purchase common shares which are
outstanding and for which the number of authorized but unissued shares is
insufficient to satisfy the maximum number of shares that could be required upon
the exercise of such warrants, then the contract is reclassified from equity to
an asset or liability. The effect of the application of this pronouncement that
requires asset or liability classification for those contracts that existed as
of September 20, 2000, would be calculated as of June 30, 2001, and presented on
that date as a cumulative effect of a change in accounting principle. At June
30, 2001, $2,863,760 was reclassified from equity to a liability and a
mark-to-market adjustment of $2,598,813 was recorded as the cumulative effect of
a change in accounting principle.
NET INCOME. Celerity had a net income of $2,298,813 for the three
months ended June 30, 2001 compared to a net loss of $2,195,983 for the
comparable period in the prior year. This net income is attributable primarily
to the cumulative effect of the change in accounting method discussed above.
Such results are not indicative of the results that may be expected for any
future period.
AMORTIZATION OF BENEFICIAL CONVERSION FEATURE AND ACCRETION OF
REDEEMABLE CONVERTIBLE PREFERRED STOCK. During the three months ended June 30,
2001, Celerity issued 100 shares of Series B Redeemable Convertible Preferred
Stock in a private placement. These shares are convertible into shares of common
stock at a price equal to $0.025 per share, which resulted in a beneficial
conversion feature of $777,654 that will be reflected as a dividend over the
two-year period until the stated redemption date. The beneficial conversion
feature resulted because the conversion price of such preferred stock was at a
discount to the price of the common stock on the date of issuance. The
amortization of this beneficial conversion feature was $113,706 in the three
months ended June 30, 2001.
NET INCOME APPLICABLE TO COMMON SHAREHOLDERS. Celerity had net income
applicable to common shareholders of $2,144,557 in the three months ended June
30, 2001 compared to a net loss of $2,195,983 in the comparable period in the
prior year. Such results are not indicative of the results that may be expected
for any future period.
SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO SIX MONTHS ENDED JUNE 30, 2000
REVENUES. There were revenues of $2,400 for the six months ended June
30, 2001 as compared to $-0- for the same period in 2000. The low level of
interactive video sales is a result of the constrained sales and marketing
activities caused by our cash shortage and delays associated with the production
of the T 6000 set top box.
COSTS OF REVENUES. Costs of revenues for the six months ended June 30,
2001 were $3,240 as compared to $685,313 for the same period in 2000. Costs of
revenues in 2000 were related to an increase in inventory obsolescence. During
the second quarter of 2000, Celerity reached an agreement with nCUBE Corporation
under which nCUBE will manufacture Celerity's updated version of it's digital
video server. This updated version rendered obsolete portions of the raw
material inventory related to the former versions of the digital video servers.
OPERATING EXPENSES. Operating expenses for the six months ending June
30, 2001 were $1,343,310 as compared to $1,896,895 for the same period in 2000,
or a decrease of $553,585. This decrease includes a reduction in legal and
professional fees of approximately $516,000 primarily from lower expenses
incurred to assist with investor relations and investment banking. Compensation
expense was down approximately $130,000 in the current six-month period but was
offset by increased contract labor incurred in the development of our
interactive digital video system. These decreases were partially offset by
increases in consulting expense incurred in the development of an updated
version of the T 6000 set top box and by increases in insurance, employee
benefits and telephone and other utility expenses.
INTEREST EXPENSE. Interest expense for the first six months of 2001 was
$228,691 as compared to $746,053 for the same period in 2000. Of these amounts,
$87,786 and $670,080 in 2001 and 2000, respectively, are non-cash expenses
related to the beneficial conversion features of certain debentures and account
for a significant portion of the reduction between the two periods. In November
2000, the Emerging Issues Task Force of the Financial Accounting Standards Board
25
reached a consensus that the discount resulting from recording a beneficial
conversion feature is to amortized from the date of issuance to the stated
redemption date of the convertible instrument, regardless of when the earliest
conversion date occurs. As a result, the beneficial conversion feature of the
convertible debentures issued after November 2000 are being amortized over the
life of the debentures, in most cases 60 months, versus an approximately 3 month
period generally used prior to the issuance of this pronouncement.
LOSS FROM CONTINUING OPERATIONS. As a result of the above factors, net
loss from continuing operations for the six months ended June 30, 2001, was
$1,063,413 as compared to $3,318,712 for the same period in 2000.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING METHOD. Effective June 30,
2001, Celerity adopted the provisions of EITF 00-19, "Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a Company's Own
Stock". This issue provides that warrants to purchase common shares which are
outstanding and for which the number of authorized but unissued shares is
insufficient to satisfy the maximum number of shares that could be required upon
the exercise of such warrants, then the contract is reclassified from equity to
an asset or liability. The effect of the application of this pronouncement that
requires asset or liability classification for those contracts that existed as
of September 20, 2000, would be calculated as of June 30, 2001, and presented on
that date as a cumulative effect of a change in accounting principle. At June
30, 2001, $2,863,760 was reclassified from equity to a liability and a
mark-to-market adjustment of $2,598,813 was recorded as the cumulative effect of
a change in accounting principle.
NET INCOME. Celerity had a net income of $1,535,400 for the six months
ended June 30, 2001 compared to a net loss of $3,282,401 for the comparable
period in the prior year. This net income is attributable primarily to the
cumulative effect of the change in accounting method discussed above. Such
results are not indicative of the results that may be expected for any future
period.
AMORTIZATION OF BENEFICIAL CONVERSION FEATURE AND ACCRETION OF
REDEEMABLE CONVERTIBLE PREFERRED STOCK. During the six months ended June 30,
2001, Celerity issued 100 shares of Series B Redeemable Convertible Preferred
Stock in a private placement. These shares are convertible into shares of common
stock at a price equal to $0.025 per share, which resulted in a beneficial
conversion feature of $777,654 that will be reflected as a dividend over the
two-year period until the stated redemption date. The beneficial conversion
feature resulted because the conversion price of such preferred stock was at a
discount to the price of the common stock on the date of issuance. The
amortization of this beneficial conversion feature was $144,335 in the six
months ended June 30, 2001.
NET INCOME APPLICABLE TO COMMON SHAREHOLDERS. Celerity had net income
applicable to common shareholders of $2,144,557 in the three months ended June
30, 2001 compared to a net loss of $2,195,983 in the comparable period in the
prior year. Such results are not indicative of the results that may be expected
for any future period.
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
REVENUES. We had no revenue for the year ended December 31, 2000, as
compared to $85,894 for 1999. The primary reason for this decrease is due to the
lack of interactive video sales in 2000. The low level of interactive video
sales is a result of the constrained sales and marketing activities caused by
our cash shortage and delays associated with the production of the T 6000 set
top box.
COSTS OF REVENUES. Costs of revenues were $717,775 in 2000 as compared
to $366,495 in 1999. We had a negative gross margin of $717,755 in 2000 as
compared to $280,601 in 1999. Costs of revenues in 2000 and 1999 were primarily
due to the write down of $683,750 and $354,523, respectively, of obsolete
inventory to net realizable value. The write down in 2000 was due to inventory
obsolescence associated with an agreement with nCUBE Corporation to manufacture
our updated line of CTL 9000 digital video servers.
OPERATING EXPENSES. Operating expenses for the twelve months ended
December 31, 2000 were $3,666,014, as compared to $4,667,719 for the same period
in 1999. The decrease is due to the significant reduction in personnel costs,
facility costs and related depreciation. Employment decreased from an average of
approximately thirty full time staff during the first quarter of 1999 to
approximately seven since that time. In January 2000, we relocated to a
significantly less costly facility. This relocation resulted in the abandonment
of certain leasehold improvements and the return of furniture recorded as part
of a capital lease, the impact of which was recorded in 1999. Additionally, we
had no bad debt expense in 2000 as compared to approximately $215,000 in 1999.
These decreases were partially offset by expenses for the engagement of
consultants to assist us with investor relations and investment banking,
non-cash payments of directors' fees, and increased outside engineering and
accounting fees. Also, stock-based compensation was recorded due to the initial
26
closing of a private offering in which approximately $1,787,000 of outstanding
notes, accounts payable and wages were canceled in exchange for warrants and
common stock at a beneficial conversion rate.
INTEREST EXPENSE AND INCOME. Interest expense for 2000 was $930,740
compared to 1999 which totaled $537,865. Of the totals for 2000 and 1999,
$724,291 and $285,235, respectively, were non-cash expenses incurred as a result
of the amortization through a charge to interest expense of the beneficial debt
conversion features of the 2000 and 1999 placements. Liquidated damages incurred
due to the late filing of certain registration statements resulted in a non-cash
expense of $89,541. Interest income was $6,804 in 2000 versus $686 in 1999. This
increase is the result of the higher average cash balances in 2000 compared to
1999 and the interest earned on related overnight investments.
LOSS FROM CONTINUING OPERATIONS. As a result of the above factors, loss
from continuing operations for the twelve months ended December 31, 2000 was
$5,322,593 as compared to $5,434,986 for the same period in 1999.
NET LOSS. Celerity had a net loss of $5,287,499 for the year ended
December 31, 2000 compared to a net loss of $5,408,156 for the comparable period
in the prior year. In addition to the factors specified above, Celerity had
income of $35,094 on the disposal of discontinued CD-ROM business.
NET LOSS APPLICABLE TO COMMON SHAREHOLDERS. Celerity had a net loss of
$5,620,407 for the year ended December 31, 2000 compared to a net loss of
$5,408,156 in the comparable period in the prior year. In addition to the
factors specified above, Celerity incurred a $33,942 of amortization of
beneficial conversion feature of Series A Redeemable Convertible Preferred Stock
because the conversion price of such preferred stock was at a discount to the
price of the common stock on the date of issuance. Moreover, Celerity had an
accretion of redeemable preferred stock of $298,966. In 1999, Celerity accreted
the carrying value of its preferred stock to 120% of liquidation value by
increasing the accumulated deficit by $298,966.
LIQUIDITY AND CAPITAL RESOURCES
Our primary source of financing since our inception has been through
the issuance of common and preferred stock and debt. We rely almost entirely on
the proceeds received from the sale of securities to meet our cash needs.
We had cash balances on hand as of June 30, 2001 of $54,453. Our cash
position continues to be uncertain.
In the first half of 2001, we received gross proceeds from the Line of
Credit Agreement of $1,800,000, $950,000 on the private placement of 100 shares
of our Series B Convertible Preferred Stock and warrants, and $30,000 from the
issuance of common stock. We are looking at several other options in terms of
relieving our cash shortage, but no commitments are in place. We are continuing
to seek to arrange financing, including possible strategic investment or
opportunities to sell some or all of our assets and business, while continuing
to pursue sales opportunities. We have granted a security interest in our
personal property to our former legal counsel. Such security interest may hinder
our efforts to obtain financing. The lack of sales or a significant financial
commitment raises substantial doubt about our ability to continue as a going
concern or to resume a full-scale level of operations.
As of June 30, 2001, we have an accumulated deficit of $30,766,474. We
expect to incur operating losses for the foreseeable future as we continue to
develop our technology and until we achieve some sales success. Since January 1,
2001, we have received new orders to install and operate end-to-end interactive
video systems in 3 multi-family developments with a total of 749 units in Texas
and Arizona and for the sale of our Digital Education System to two Ohio school
systems. There can be no assurance, however, as to the receipt or timing of
revenues from operations, including, in particular, revenues from products
currently under development.
As of June 30, 2001, we had negative net working capital of
approximately $1,634,000. We had no significant capital spending or purchase
commitments at June 30, 2001 other than certain facility leases and inventory
component purchase commitments required in the ordinary course of our business.
Celerity entered into a Line of Credit Agreement that expires on
October 31, 2001, under which a maximum amount of $10,000,000 of debentures may
be issued. As of June 30, 2001 Celerity had drawn $2,805,000 under the Line of
Credit. As a result of a recent SEC Interpretation, the terms of this Line of
Credit Agreement do not meet the criteria for registration of the common stock
which would be issued upon conversion of these debentures.
27
On June 14, 2001, Celerity entered into an Equity Line of Credit
Agreement pursuant to which Celerity may, at its discretion, periodically sell
to the Investor, Cornell Capital Partners, L.P., shares of common stock for a
total purchase price of up to $10.0 million. For each share of common stock
purchased under the Equity Line of Credit, the Investor will pay 82% of the
average of the 3 lowest closing bid prices on the Over-the Counter Bulletin
Board or other principal market on which our common stock is traded for the 5
days immediately following the notice date. A consulting fee of 10% of each
advance will be paid to the agent upon closing each of the sales under this
agreement. The consultant received warrants to purchase 3,500,000 shares of
common stock at an exercise price of $0.10. The $1,530,000 fair value of these
warrants was recorded as a cost of the transaction. These warrants expire in
June 2006. For additional information regarding the Equity Line of Credit,
please see Note 8 to Celerity's financial statements for the six months ended
June 30, 2001.
In August 2001, Celerity received net proceeds of approximately
$889,000 from the sale of convertible debentures with an original principal
balance of $1,586,000. These debentures accrued interest at 4% per year and are
convertible into shares of common stock at a conversion price equal to 75% of
the average closing bid price of Celerity's common stock for the 5 days prior to
conversion. At Celerity's option, these debentures may be paid in cash or
converted into shares of common stock on the fifth anniversary, unless converted
earlier by the holder. These funds have been used for Celerity's working capital
needs.
In October 2001, Celerity received net proceeds of $400,000 from the
sale of convertible debentures with an original principal balance of $665,000.
These debentures accrued interest at 4% per year and are convertible into shares
of common stock at a conversion price equal to 75% of the average closing bid
price of Celerity's common stock price. At Celerity option, these debentures may
be paid in cash or converted into shares of common stock on the fifth
anniversary, unless converted earlier by the holder. Also in October 2001,
Celerity sold 6 shares of Series C Preferred Stock for $60,000 in cash. Each
share of Series C Preferred Stock is convertible into 250,000 shares of common
stock. Celerity projects that the remainder of these funds will be sufficient to
finance its operations through November 30, 2001. Thereafter, Celerity will need
to raise additional capital to continue operations. Celerity will seek to raise
such capital through the sale of securities in private or public transactions,
including the sale of common stock under its Equity Line of Credit. Celerity
estimates that once the accompanying registration statement is declared
effective that it will be able to draw up to $50,000 to $70,000 per month under
the Equity Line of Credit assuming its stock volume and stock price does not
decline materially. See "Equity Line of Credit" for an illustration of how much
would have been available to Celerity on October 1, 2001. Celerity expects to be
able to draw proceeds under the Equity Line of Credit 2 to 3 times per month.
Celerity may also receive capital under a Financing Agreement with
Artesian Direct Holdings Corporation entered into in August, 2001. Pursuant to
this agreement, Artesian Direct agreed to purchase $10 million of Celerity's
products or to provide to Celerity $10 million of financing. Celerity expects to
use any financing received under this contract to purchase inventory and to pay
for the installation of its products for its customers, including at multiple
dwelling units. In exchange for its commitment, Artesian Direct received from
Celerity 2,400,000 shares of Celerity's common stock. As part of this
transaction, Ed Kidston, a member of Celerity's Board of Directors, purchased a
30% stake in Artesian Direct and became a shareholder of Artesian Direct. Mr.
Kidston partially guaranteed Artesian Direct's performance under this agreement.
See "Certain Relationships and Related Transactions" for a discussion of Mr.
Kidston's obligations under the partial guaranty.
Celerity is also seeking to raise capital by obtaining financing from
institutions. To that end, in September, 2001, Celerity entered into a contract
with Internet Finance International Corporation pursuant to which Internet
Finance will use its best efforts to assist Celerity in raising financing. For
its services, we issued Internet Finance warrants to purchase 500,000 shares of
common stock. One-half of these warrants had an exercise price of $0.15 per
share and one-half had an exercise price of $0.25 per share. In addition, we are
obligated to issue to Internet Finance warrants to purchase additional shares of
common stock if we receive financing arranged by Internet Finance. For each
$500,000 of capital received by Celerity, Internet Capital will receive warrants
to purchase 250,000 shares of common stock at $0.15 per share. Internet Finance
will also receive cash compensation of 2.5% of all funds received by Celerity
under the contract.
We have no existing bank lines of credit.
ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement No. 141 (FAS 141), Business Combinations, and Statement No. 142 (FAS
142), Goodwill and Other Intangible Assets.
FAS 141 supercedes APB 16, Business Combinations and primarily
addresses the accounting for the cost of an acquired business (i.e., the
purchase price allocation), including any subsequent adjustments to its cost.
The most significant changes made by FAS 141 involve the requirement to use the
purchase method of accounting for all business combinations, thereby eliminating
28
use of the pooling-of-interests method along with the establishment of new
criteria for determining whether intangible assets acquired in a business
combinations should be recognized separately from goodwill. FAS 141 is effective
for all business combinations (as defined in the statement) initiated after June
30, 2001 and for all business combinations accounted for by the purchase Method
that are completed after June 30, 2001 (that is, the date of the acquisition is
July 1, 2001 or later). Celerity does not expect adoption of FAS 141 to have a
material impact on its reported results of operations, financial position or
cash flows.
FAS 142 primarily addresses the accounting for goodwill and intangible
assets subsequent to their acquisition (i.e., the post-acquisition accounting).
FAS 142 supercedes APB 17, Intangible Assets. Under FAS 142, goodwill and
indefinite lived intangible assets will no longer be amortized and will be
tested for impairment at least annually at a reporting unit level. Additionally,
the amortization period of intangible assets with finite lives is no longer
limited to forty years. FAS 142 is effective for fiscal years beginning after
December 15, 2001 to all goodwill and other intangible assets recognized in an
entity's statement of financial position at that date, regardless of when those
assets were initially recognized. Early application is permitted for entities
with fiscal years beginning after March 15, 2001 provided that the first interim
period financial statements have not been issued previously. Celerity does not
expect adoption of FAS 142 to have a material impact on its reported results of
operations, financial position or cash flows.
FASB Statement of Financial Accounting Standards No. 143 "Accounting
for Asset Retirement Obligations" ("SFAS 143") was issued in August 2001. SFAS
143 changes the accounting and reporting for asset retirement obligations. SFAS
143 is effective for fiscal years beginning after June 15, 2002. The Company is
currently assessing the effect, if any, on its financial statements of
implementing SFAS 143.
29
DESCRIPTION OF BUSINESS
COMPANY OVERVIEW
We develop and manufacture digital video servers and digital set top
boxes for the interactive television and high speed Internet markets. We also
are seeking to offer a number of enhanced services such as home energy
management, and security and healthcare monitoring, and have identified several
market segments for the long-term deployment of this technology: multiple
dwelling units ("MDU") housing, hotels, schools, telephone, cable, and energy
companies, hospitals and assisted living centers, and corporate applications.
We have targeted the following market segments:
In the near-term, we believe the MDU marketplace offers a promising
outlet for our products with nearly 34 million housing units in the United
States alone. We believe that this market opportunity exists due, in part, to
poor service provided by traditional cable operators, and because it is possible
to sign long-term exclusive right of entry contracts with building owners in 35
states. We recently announced our first three MDU projects for Bala Properties.
We also believe that the hospitality industry is also well suited to
our products. Market research indicates that guests are no longer satisfied with
cable TV and pay-per-view alone and instead are demanding new services, such as
interactive TV and high-speed Internet connections.
Education is emerging as a high priority under the new administration.
State and federal governments are spending heavily on education technologies. We
recently announced our first sale to a school in the Adena School District in
Ohio.
We also believe that the intense competition among traditional
telecommunications companies, cable companies, competitive local exchange
carriers (CLECs), long distance carriers, energy companies, and Internet service
providers (ISPs) to provide a robust suite of enhanced broadband digital
services to homes, schools, multi housing, hospitals, and the hospitality
industry provides another emerging opportunity for our products.
The burgeoning need for extensive but user-friendly services in
hospitals, assisted living facilities also appear to offer great opportunities
for us. In addition to a demand for entertainment programming, our services can
include staff and patient training and education, medical monitoring and
management.
RECENT DEVELOPMENTS
As of June 30, 2001, we had cash on hand of $54,453 and working capital
of approximately $(1,899,026). Our operations are financed primarily from the
sale of debt and equity securities. For the foreseeable future, we believe we
will continue to rely on external capital to fund our operations. Without the
Equity Line of Credit, we believe that we have enough cash to last through
November 2001.
We are continuing to seek additional sources of capital in order to
repay our obligations and to provide for our working capital requirements for
the long-term. We are also continuing to seek strategic investments from one or
more large or well-known companies in the interactive video services,
telecommunications or high speed Internet industries. We believe that the
involvement of such a firm or firms is material to our ability to grow. There
can be no assurance that we will be able to obtain any such required additional
funds on a timely basis, or on favorable terms, or at all.
In February 2001, we sold the assets of our CD-ROM segment for 20
convertible preferred shares of Maxwell Rand, Inc. Since we had written the
assets of this segment down to zero, and the fair value of the shares of Maxwell
Rand are not currently determinable, no gain or loss on this sale has been
recorded.
In January 2000, we agreed to a settlement of an outstanding account
receivable from Integrated Network Corporation and ViaGate Technologies related
to projects in China. We accepted a $45,000 settlement in lieu of the $224,000
owed. At this time, there are no significant accounts receivables due to us.
The following discussion of our business and, in particular, our sales
and marketing plans, assumes that we will receive sufficient capital to continue
as a going concern. Depending upon the amount of proceeds, if any, received by
us, and the timing of those proceeds, our ability to continue as a going concern
could be adversely affected.
30
OUR PRODUCTS
Our products for the interactive video services market consist of
products that we develop and manufacture and products manufactured by others
that we resell and integrate into our system.
PRODUCT MANUFACTURED BY US
DIGITAL SET TOP BOXES. We have developed a new digital set top box, the
T 6000. The T 6000 is designed to work with many transmission networks and
supports multiple outputs of video, sound and data. We believe that the T 6000's
open architecture and array of functionality and connectivity make it one of the
more advanced products in the industry. Features include a Pentium processor,
extensive memory, a wide array of network inputs and system outputs, 2D and 3D
graphics and an attractive consumer design. The set top box also incorporates
hardware and software that can be utilized for home energy management, home
security monitoring and healthcare monitoring.
PRODUCTS MANUFACTURED AND DEVELOPED BY OTHERS
We also intend to use products manufactured by others, including:
DIGITAL VIDEO SERVERS. Previously, we manufactured two different video
servers: (i) an asynchronous transfer mode (ATM) based server, the CTL 9000,
designed to be used for FTTC, DSL and HFC networks, which has been deployed in
Taiwan and China; and (ii) a scaled down ATM server, the CTL 7000, used for
trials, focus groups and similar applications, which has been deployed in
Canada. We entered into an agreement with nCube in June 2000 to have an OEM
version of their nCube Media Cube 4 digital video server manufactured for us as
the Celerity CTL 9500, but with substantially better cost, size, reliability and
environmental tolerance. These ATM based servers include improvements in cost
per stream, capacity and operating speed over previous models and are designed
to simplify connections to current networks and provide valuable new features,
including variable bit rate, data stream grooming, data flow improvement and
higher bandwidth. The servers are all scalable, enabling them to be used in
small to large-scale deployments. For large-scale deployments, the servers can
be deployed in nodes which can include one or more servers. As part of our
agreement with nCube, we purchase the Oracle OVS3 operating system software. In
addition, our servers incorporate or interface with HTML, Java, Solaris and
other software systems.
Our digital servers are standards compliant and have been proven to be
interoperable with the network and switching equipment of several major
companies, including Alcatel, Nortel and Cisco. We have also successfully
integrated its digital video servers with digital set top boxes made by other
companies including Samsung, Tatung, Hyundai and Acorn.
NETWORK EQUIPMENT. We have certain formal and informal arrangements
with Nortel, Cisco, Extreme Networks and ViaGate Technologies to include their
network equipment as part of overall bids for end-to-end interactive video
systems and in certain cases to be included in end-to-end bids by these
companies. Nortel, for example, has done a number of bids which include our
products.
Although we provide digital video servers, we are seeking to enter into
arrangements with other digital video server manufacturers, such that they will
offer our T 6000 digital set top box as part of end-to-end systems.
OTHER EQUIPMENT. Interactive video services systems also utilize
components such as digital encoders, digital production studio equipment,
digital production software and other equipment. We have entered into certain
arrangements with respect to the resale of digital encoders and are seeking to
enter into additional arrangements with sellers of this kind of equipment, with
a view toward to enabling us to offer a complete end-to-end system to potential
customers on a fully integrated basis.
OTHER SOFTWARE. We provide a basic video-on-demand application, which
we call the "Celerity" user interface and some sample applications, such as
shopping, as part of our server software. However, most system operators will
require a suite of applications upon installation of this type of system, with
the potential of adding additional applications in the future. We have entered
into certain arrangements to provide interactive video applications software and
are seeking to enter into additional arrangements to provide interactive video
application software and business support systems software to our customers. We
have also entered into an agreement with Battelle Laboratories in which Battelle
is providing home energy management software which operates on the T6000 digital
set top box at no cost to us. Upon the sale of such software, the revenues will
be shared between the parties.
31
INTERACTIVE VIDEO/HIGH SPEED INTERNET SEGMENT
Our products can be adapted over a variety of interactive video
systems. The following is an overview of these interactive video systems:
INDUSTRY
INDUSTRY OVERVIEW
LINEAR TELEVISION AND VCR TECHNOLOGY. Until about 30 years ago,
audio-visual home entertainment choices were primarily limited to linear content
(i.e., content that plays in a pre-programmed sequence and which cannot be
controlled by the viewer). In the 1970's, the growing popularity of
videocassette recorders (VCR's) and videocassette tapes provided new choices to
home viewing audiences. VCR and videocassette technology provides viewers with
the ability to view content on demand and to manage content through the use of
pause, resume, fast forward, rewind, and other features. VCR use, however,
entails the inconvenience of leaving home to purchase or rent video cassettes or
choosing from among the often limited content available for recording on
television. Many video stores have only a limited selection of titles,
particularly in areas such as educational content and games, and the most sought
after titles are frequently unavailable. The proliferation of cable television,
satellite television, pay-per-view, and similar technologies has improved linear
television choices, but these technologies do not offer the ability to select
content to be viewed on demand, rather than on a scheduled basis. New
technologies such as digital video disc (DVD) have improved the quality of
stored content, but entail similar inconveniences and limited choices as VCR
technology. New technologies such as Replay and TiVo allow digital recording
from television; however, they have complicated user interfaces and a very
limited range of available content.
TELECOMMUNICATIONS COMPANIES AND BROADBAND INTERACTIVE SERVICES. In the
early 1990's, telephone and cable companies and other interested parties, such
as television and motion picture studios, began to experiment with the idea of
providing broadband interactive services. Broadband services are those which run
over a high capacity digital network such as asynchronous digital subscriber
lines (DSL), high speed data lines (T1 and E1), hybrid fiber coaxial cable (HFC)
lines, and fiber to the curb (FTTC) fiber optic lines, as well as wireless
technologies such as satellite and multi-channel, multi-frequency distribution
service (MMDS). These high capacity networks, made possible by breakthroughs in
the ability to convert information from analog to digital form and by improved
data compression technologies, have the ability to deliver vast quantities of
data into a home, hotel, business or other facility. Broadband networks also
have the capacity to provide for interactivity between the user and content
providers. Industry sources anticipate that, if broadband networks become widely
deployed, they will usher in a new age of information technology due to the
potential quantity and robustness of content, and the speed, ease of use and
interactivity of those networks.
Following changes in the regulation of the telecommunications industry
in 1992, it was anticipated that the large domestic telephone and cable
companies, and their counterparts abroad, would seek to deploy broadband
networks and interactive services in communities on a widespread basis. The
Regional Bell Operating Companies (RBOCs), for example, successfully sought
relief in the courts to be permitted to become not only network providers for
such services, but content providers as well. Further regulatory changes in 1995
and 1996 reduced the potential cost of deploying broadband networks. A number of
interactive video trials were run by U.S. companies, including Time Warner,
Telecommunications, Inc. (TCI), GTE, Verizon and BellSouth Corporation, which
demonstrated that the technology did work, although to varied degrees.
International telecommunications companies, including Telecom Italia, Korea
Telecom, Hong Kong Telecom, Deutsche Telekom and British Telecom, demonstrated
similar results abroad. These trials were generally costly, in part because they
were characterized by "trial approaches" including development and testing of
prototype versions of equipment and alpha and beta versions of newly developed
software, and experiments in pricing, content, menus, navigation and
methodologies. Further, these trials occurred during a period of rapid
technological change and improvement and evolving standards. For example, DSL
equipment, which now typically costs a few hundred dollars per home, typically
cost a few thousand dollars per home in 1993.
By 1997, activity in the broadband services area had been significantly
reduced, and some companies, such as Verizon and TCI, had announced reductions
or delays in their deployment plans. Reasons given for such reductions or delays
included a change of focus toward local and long distance competition, the high
cost of deploying large broadband networks, business reorganizations, delays
pending the introduction of lower cost, more functional, or industry standard
technologies and reduced competitive threats from within the industry. By 1999,
however, these companies were beginning to show some renewed interest, primarily
due to competitive DSL and cable modem providers beginning to penetrate their
markets.
32
NARROWBAND INTERACTIVE SERVICES. Beginning in the 1980's, the
proliferation of home computers and the development of the Internet and Internet
service providers, such as America Online, Prodigy, Compuserve, EarthLink and
MindSpring, have allowed millions of people to access interactive content and
services over telephone lines. Internet content is becoming increasingly rich,
robust, and interesting. Industry sources estimate that United States consumers
spent more than $620 million for Internet services in 1996, and project that
such expenditures will grow to more than $15 billion in 2001, and that the
number of Internet households will grow from an estimated 23.4 million in 1996
to 66.6 million in the year 2000. The Internet has begun to condition consumers,
and younger consumers in particular, to obtaining information, experiencing
content, playing games and shopping in an interactive fashion. However,
telephony based services, which are generically referred to as narrowband
services, have constraints on the quantity of information that can be delivered,
and are currently unable to download large files, such as full length videos, at
a satisfactory quality or speed. Computers tend to be relatively expensive,
compared to television sets, and computers monitor and display technologies are
not optimized for viewing video content. Furthermore, although most people are
comfortable with television as a medium, many people, especially older
consumers, lack experience with computers and may be uncomfortable with, or are
averse to, computer technology.
Different companies have employed different strategies to address the
shortcomings of narrowband networks in the absence of generally available
broadband networks. For example, WebTV (owned by Microsoft) has begun offering
enhanced graphics and other features over narrowband networks with a television
rather than a PC interface. In order to address the need for high speed
services, the cable industry has begun deploying cable modems, and the telephone
industry has begun deploying DSL equipment for high speed access, so that the
narrowband services can run at the highest possible speed on metallic, telephone
or cable lines. For example, @Home Network is deploying as a high speed Internet
Service Provider (ISP) on several cable companies' networks. We believe that,
despite these and other initiatives, narrowband networks are unlikely to achieve
the combination of technological accessibility and speed, security, and
robustness of transmission characteristic of broadband systems. The public
access methodology in the Internet and other narrowband networks, coupled with
off -the-shelf modems, makes security, both for privacy of communications and
secure commercial transactions, difficult to achieve. The hardware and software
of interactive broadband systems and the architecture of such networks creates a
more secure environment for such transactions. In addition, although better
software, compression methods and other tools have enabled improvements in
narrowband services, the physical constraints of narrowband networks are
substantial compared to those of broadband networks. Many narrowband lines,
especially older lines in cities (a preferred market segment) cannot run at 56
kilobits per second (kbps) the highest widely available PC modem rate. This rate
does not compare to 1.5 Megabits to 25 Megabits per second rates provided by
broadband networks.
CELERITY'S BROADBAND INTERACTIVE VIDEO SERVICES. We believe that the
increase in linear viewing alternatives such as direct broadcast satellite (DBS)
have increased consumer demand for more content choices and that the development
of the Internet has increased consumer interest in interactive content
generally. We believe that the inherent limitations of narrowband networks, as
compared with broadband networks, creates a market opportunity for a broadband
technology, such as Celerity's, that offers superior speed and robustness,
combined with a "user friendly" television-based technology. See "User
Experience". In addition, the lack of major deployments by the RBOCs and other
major U.S. telecommunications companies in the broadband market has, we believe
kept many large consumer electronics companies from actively pursuing plans to
supply hardware and software for broadband networks, thus enhancing the niche
market opportunities for us. Even if major domestic telecommunications were to
currently undertake such initiatives, it would take a substantial number of
years and a massive capital commitment to deploy large-scale broadband networks.
We also believe that advances in servers, set top boxes, and network equipment
enable operators of small scale broadband networks to now offer interactive
video services to their subscribers at attractive prices. See "Potential
Markets" and "Marketing Strategy."
BASIC INTERACTIVE SERVICES CONFIGURATION
An interactive video services networks system typically includes the
following components: (i) network equipment, including high speed lines and
switches, for transmission of content; (ii) digital set top boxes, which receive
the content and transmit subscriber requests; (iii) digital video servers, which
store the content and control its transmission over the network; (iv) content
and (v) software which runs user applications and business support applications
such as subscriber billing. See "Products."
NETWORK EQUIPMENT
High Speed Lines (DSL, T1/E1, HFC, FTTC, satellite, MMDS) connect the
network service provider's central office or head end to subscribers homes,
hospital beds, dormitory rooms or hotel rooms. High-speed networks switching
equipment connects subscribers to content furnished by video information
providers (VIPs), either locally or internationally. There are a large number of
providers of this network equipment, including CF Alcatel, Extreme Networks,
Inc., Ericsson, ViaGate Technologies, Lucent Technologies, Scientific Atlanta,
Inc., Elastic Networks and Siemens Communications.
33
DIGITAL SET TOP BOXES
In each subscriber location, one or more digital set top boxes and
remote control devices are associated with each television set and/or personal
computer that receives interactive video programming. Digital set top boxes
feature high-speed processors, RAM memory, high and low speed output ports and
other computer components.
DIGITAL VIDEO SERVERS
The digital video server is a high-speed computer to which a subscriber
is connected via the network. The basic functions of a digital video server are
to cost effectively (i) store and rapidly retrieve and transmit large amounts of
content, (ii) provide a large number of input/output ports so that subscribers
can access the system quickly and easily retrieve information, (iii) function
with an operating software system to manage user applications, and (iv) provide
business support systems capability to accumulate and provide data for services
such as billing, customer service and content management.
CONTENT PREPARATION EQUIPMENT
In order to store content in a digital server, send it over a broadband
network, and interpret the content through a digital set top box, the content
must be encoded (or converted from analog to digital format) and compressed.
Compression standards, primarily Motion Picture Experts Group One and Two (MPEG1
and MPEG2), have been adopted for the preparation and storage of this content.
APPLICATIONS AND BUSINESS SUPPORT SOFTWARE
Operators of interactive video systems require two kinds of software in
addition to the operating system software for servers and set top boxes.
Interactive applications software is designed to offer services, such as
shopping, travel, banking, education, medicine, video-on-demand, karaoke and
digital music. Business support systems (BSS) software includes applications
such as customer service, billing, telemarketing, content management, content
provider management, workforce management and similar functions. Applications in
BSS software are available from a number of companies, including Arrowsmith,
EDS, IMAKE, Informix and Prasara and we anticipate that the availability of
applications software, in particular, will increase as broadband networks
proliferate.
SERVICES
We intend to act as an overall systems integrator for interactive video
projects, which may entail integrating the end-to-end system in our products
prior to shipment, on-site integration, or both. The scope of work required for
integration will vary widely, depending upon project size and other variables.
We also offer a number of additional services, including customer training,
documentation, maintenance and support.
CONTENT
We intend to enter into arrangements with content integrators and
content owners so as to be able to offer content as part of end-to-end
solutions.
USER EXPERIENCE
Current subscribers to interactive video services enjoy a broad scope
of new content and applications. Content available "on demand" is stored on a
digital video server and may be viewed by any subscriber at any time chosen by
the subscriber by the use of a navigation/menu system.
We anticipate that applications will become more robust, numerous and
exciting in the future as new content, applications and enhanced technical
capabilities become available. For example, travel reservations and information
could be a possible application for interactive video services. A subscriber
equipped with an ordinary television set or PC, a digital set-top box and a
hand-held remote control or wireless keyboard could select a travel company,
which would be a video information provider (VIP) on the system, from an
on-screen menu. A typical application might show major geographic areas, such as
Asia, Europe, the United States and the Caribbean. A subscriber choosing Europe,
for example, would be provided with a further choice among European countries.
By choosing a country, e.g., Spain, a subscriber could be presented a choice
among video, graphic and data content relating to that country, such as general
interest videos and information relating to packaged tours, airline options and
hotels. Similar applications are currently available on narrowband services,
34
such as the Internet; however, broadband applications such as our products can
accommodate lengthy high quality videos and robust graphics, including
three-dimensional graphics, which cannot currently be as efficiently downloaded
or viewed via a narrowband network. We also believe that the significantly
greater security, both for transactions and communications, available through
broadband networks will be more attractive to consumers. We believe that
broadband networks could, in the future, also include applications with an
electronic data interchange (EDI) back end, which would allow the subscriber to
ascertain the availability and confirm reservations for different products and
services such as hotel or car rental or airline tickets on a near-real-time
basis, including potentially two-way video conversations with agents.
Customers will typically be billed a monthly fee for access to the
interactive services, a rental fee for the set top box and additional fees for
the content and applications accessed although it is anticipated that certain
VIPs will provide applications without a separate charge as means of increasing
sales of products or services.
POTENTIAL MARKETS
The markets for interactive video systems may be categorized as public
or private networks. Public networks, such as those of telephone companies,
cable companies, energy companies or Internet service providers (ISPs), are
potentially available to all consumers with a given geographical market. Private
networks are those offered in a more limited area, such as a hotel, hospital,
apartment building, school or business complex or college campus.
STRATEGY
MARKETING STRATEGY
Our marketing strategy is to seek customers in each of the potential
emerging markets, to encourage the leading companies and organizations to adopt
this technology and to position our self as a leading provider of interactive
video services within niche markets. We believe that it is important to achieve
market penetration at an early stage in the development of particular niche
markets in order to compete successfully in those markets. Our marketing is
based on our demonstrated ability to install digital video systems on each of
the major network types and its potential to provide end-to-end interactive
video solutions. See "Deployments" and "Strategic Alliances." In addition, the
scalability of our servers provides flexibility in deploying interactive video
services systems varying in size from systems designed to serve 25 simultaneous
users to those capable of serving many thousands of users in a variety of
markets on a cost effective basis. We believe that this scalability would be an
attractive feature to potential customers. We also believe that our T 6000
digital set top box, with its wide range of capabilities to interconnect with
many different networks and many different peripheral and display devices, will
allow us to compete favorably in several different markets, either with our own
digital video server or with others. We believe that a diversified marketing
approach provides us with flexibility in targeting emerging markets, enabling us
to recognize market opportunities and adapt to perceive changes in marketing
priorities. However, due to our limited resources, we have determined to focus
on those markets in which we believe there is greater interest at this time,
while looking for targets of opportunity in our other niche market segments. We
believe that the markets which appear most favorable at this time are schools,
energy companies, hospitality, hospitals and multi-housing. We have limited
sales and marketing experience and there can be no assurance that we will be
successful in implementing its marketing plans. See "Risk Factors - Limited
Sales; Limited Marketing and Sales Experience."
PUBLIC NETWORKS
We also believe there are potential market opportunities in public
networks, such as those maintained by electric companies, telephone companies,
cable companies and Internet service providers in North America.
ELECTRIC COMPANIES. Domestic electric companies are now being
deregulated and are subject to intense competitive pressures and the need to
find new sources of revenue. Many electric companies have installed or are
continuing to install fiber optic lines in communities for remote meter reading
and equipment monitoring purposes. These lines could be used to provide a full
menu of video services. Electric companies are not currently regulated in the
same manner as cable and telephone companies, typically have long standing
relationships with subscribers and often have pole and buried cable rights of
way which could give them a competitive advantage over potential entrants into
the interactive video services market. Electric companies may also see the
provision of additional services as a means as protecting key customers, such as
hospitals, from incursion by other energy companies outside their operating
territory, that can now sell to these customers under the operating principles
of the North American Power Grid System. A number of electric companies in the
United States and Canada have expressed an interest in such deployments and one
energy company, Hopkinsville Electric Service, in Hopkinsville, Kentucky, has
ordered a system from us.
35
TELEPHONE COMPANIES. There are more than 1300 independent domestic
telephone companies and ten major telephone companies within North America.
Major independent telephone companies include Sprint Corp, Buena Vista Tel. and
Cincinnati Bell Incorporated. In addition, there has arisen an entire new class
of telephone companies called Competitive Local Exchange Carriers (CLECs)
including such successful and growing companies as RCN. We believe that as
telephone companies upgrade their backbone networks to fiber optics and begin to
deploy high-speed services to homes, they are ideal candidates to install our
systems. Local telephone companies, including long distance carriers that are
installing local telephone networks, have installed or plan to install modern
fiber optic networks may be seeking new revenue opportunities to offset the cost
of such installations. We believe that independent telephone companies and CLECs
may have more flexible management styles than large telecommunications companies
and may be quicker to commit to strategic decisions, such as providing
interactive video systems to their customers.
FOREIGN TELEPHONE COMPANIES. Up until this time, most of our
deployments have been for telephone companies outside the United States. Foreign
companies have been more active in deploying interactive video services than
domestic U.S. companies. We believe that, in part, this is because in many
countries the telephone company is owned or supported directly by the
government, which may see the addition of such services, especially public
interest services such as education and health oriented services, as being
beneficial to its citizens. Because of the lack of name recognition and because
we have lacked our own direct sales force, we have been limited to responding to
customer bids and has made only limited sales in this market, which we believe
is large and rapidly growing. Potential markets are emerging in Europe, Latin
America, Canada and Africa, in addition to existing and merging markets in Asia.
However, we have found that such projects are difficult and expensive to
perform, and therefore we are not actively marketing our services abroad.
However, should we find profitable, well-funded projects outside the U.S. where
we have has a reliable strategic partner in that geographic area, we would
entertain doing such international projects. See "Deployments."
CABLE COMPANIES. The large domestic cable companies are currently
served virtually entirely by Scientific Atlanta and Motorola. Private cable
companies and companies wishing to supplant the local cable company, such as
DirecTV, have an interest in deploying interactive video services, particularly
in markets such as the multi-housing industry.
INTERNET SERVICE PROVIDERS. There has been a recent move on the part of
major Internet service providers including AOL Time-Warner, COVAD and others to
install high speed digital networks, either fiber, DSL, or some combination
thereof, in major city markets throughout the U.S. for the purpose of high-speed
Internet access. We believe that new ISPs are very interested in providing a
large profitable array of services to their customers to help justify the cost
of these installations and the cost, on the subscriber's part, of the monthly
service.
PRIVATE NETWORKS
Many hospitals, apartment/condominium complexes, hotels, resorts,
colleges and universities and businesses have installed or are considering
installing private networks utilizing ATM, DSL, HFC, FTTC, or wireless
technologies. Private networks are limited in geographic size and scope, but
could potentially offer a wide range of interactive video and data services to
their customers, generally on a for-profit basis. Private networks have the
significant advantage of relatively rapid and low cost deployment, as it
compared to large-scale public networks and they are well suited to the
scalability of our technology solutions.
DIGITAL HOSPITALS. Many domestic and foreign hospitals are already
wired with state-of-the-art, high-speed digital networks (such as ATM or
Ethernet) which would be suitable for interactive video services systems,
although it is currently unclear who would fund these systems. We are aware of
several situations in which health care providers such as pharmaceutical
companies have expressed a willingness to underwrite some or all of the cost of
content shown on these systems in return for strategic positioning in
advertising. Our digital server, set top box and operating system technology
could potentially accommodate an architecture designed to allow patients to view
advertisements targeted to their condition, which could be attractive to
advertisers. Another potential source of funding is energy companies, which
value hospitals as high- demand consumers of electric power. A few power
companies have expressed preliminary interest in the idea of installing our
interactive video system in a mid-sized or large hospital as part of a
multi-year power contract. We believe that another potential source of funding
is the hospitals themselves. Interactive systems may be password- and
ID-protected, so that the user is individually identified within the system. We
believe the system could be designed to show patients targeted videos containing
medical information or instructions which they would then electronically "sign"
prior to being allowed to view entertainment services. Such a system could be
attractive to hospitals as a means of patient education and to ensure that
patients (or staff) have read and understand instructions and other information,
such as liability warnings.
MULTIPLE DWELLING UNITS (MDUs). Many large apartment complexes,
condominiums, gated communities and similar groups of homes, termed Multiple
36
Dwelling Units or MDUs are now installing modern DSL, ATM, fiber optic, Ethernet
or other network systems during construction or as an upgrade in order to
attract or retain tenants or as a source of revenue. We believe that certain
types of MDUs, such as retirement communities, represent particularly attractive
potential markets, since these networks might offer shopping, education,
interactive health and entertainment services to senior citizens or to consumers
who have limited mobility. We are continuing to look for investors to pay for
the equipping of such buildings and if such investment is obtained, we intend to
move forward in the MDU market. In January and March 2001, we announced
contracts with Bala Properties and In4Structures to do MDU projects in Arizona
and Texas.
DIGITAL HOSPITALITY. Some hotels, motels and resorts are already
considering upgrading to a full digital interactive services solution. We
anticipate that certain upscale hospitality properties, in particular, will
install digital systems during construction or thereafter upgrade to digital
systems. These digital systems have the potential to offer on-demand video
programming, games, gaming, shopping, health, education and other services, in
addition to high quality pay-per-view programming. In June 2000, we entered into
agreement with WIT Technologies under which WIT will purchase at least 500,000
digital set top boxes and some digital video servers over five years.
COLLEGES AND UNIVERSITIES. Many colleges have begun installing modern
high-speed networks, usually fiber optic, ATM or Ethernet, on their campuses.
Interactive video services provide an opportunity to add entertainment,
educational and information services to these networks both as a source of
revenue to help defray the cost of network installation and for educational
purposes. For example, popular courses could be stored on a server for viewing
by large audiences on a fully interactive basis, with the potential for
interactive test-taking and homework submission. Such a system could also aid
ill or physically handicapped students, those who work part time, absentees and
those who live a significant distance from the college or university.
SCHOOLS. Improving primary and secondary education has become a
national priority. Many states and the federal agencies are looking to advanced
technologies to make a difference. In March 2001, we announced our first school
system sale in Adena, Ohio.
CORPORATE. We believe our products and services are well suited for
point of sale (POS) applications in which a server and multiple set top boxes
would be deployed in a large retail environment to provide customers with
detailed information on products and services, including pricing, specials,
training and the like.
We believe that the broadband digital networks represent a logical
extension of Intranets. Business applications, such as training, data
management, communications and public relations, could potentially be
accommodated on broadband digital networks. The availability of such networks in
a corporate campus could also be employed to attract companies to a particular
business complex.
37
MANAGEMENT
Our present directors and executive officers are as follows:
NAME AGE POSITION
------------------------ ------- -----------------------------
Kenneth D. Van Meter 54 President, Chief Executive
Officer and
Chairman of the Board
Fenton Scruggs 63 Director
David Hultquist 38 Director
Bruce Thompson 71 Director
Edward Kidston 41 Director
The following is a brief description of the background of our directors
and executive officers.
KENNETH D. VAN METER has been our President and Chief Executive Officer
since January 20, 1997. He was elected Chairman of our Board on March 25, 1997.
From May 1995 to January 1997, Mr. Van Meter served as Sr. Vice President,
Operations, for Tele-TV Systems, a limited partnership owned by Verizon, NYNEX,
and Pacific Telesis, which was engaged in providing systems, software, and
services for its three parents in the interactive digital services industry.
From June 1994 to May 1995, Mr. Van Meter was President of Bell Atlantic Video
Services Interactive Multimedia Platforms, a wholly-owned subsidiary of Bell
Atlantic. From April 1993 to June 1994, Mr. Van Meter was Vice President of Bell
Atlantic Video Services. Prior to joining Bell Atlantic, from 1991 to 1993, Mr.
Van Meter was Vice President and General Manager for Thomas Cook Limited, a
travel services company. From 1989 to 1991, Mr. Van Meter was Group Vice
President for two divisions of National Data Corporation ("NDC"). From 1984 to
1989, Mr. Van Meter was Director and General Manager of two businesses for
Sprint Corp., United Business Communications (shared tenant services), and the
Meeting Channel (2-way digital video teleconferencing). Mr. Van Meter holds an
MBA with highest honors in management and marketing from the University of
Georgia, and a B.S. with high honors in Chemistry from West Virginia University.
FENTON SCRUGGS, one of our founders who funded our initial start-up,
has been a member of our Board of Directors since our inception in 1993. Dr.
Scruggs is a Board Certified Pathologist from Chattanooga, Tennessee, who has
been in private practice since 1969. Dr. Scruggs received his undergraduate
degree from the University of Virginia in 1959 and his graduate degree from the
University of Tennessee in 1962. Dr. Scruggs completed his residency at Memphis
Methodist Hospital and was a General Medical Officer in the U.S. Air Force from
1963 to 1965.
DAVID HULTQUIST became one of our directors in October 2000. Mr.
Hultquist has been President of Capital Resource Consultants since 1999. From
1998 to 1999, Mr. Hultquist served as Chief Operating Officer, Chief Financial
Officer and in certain other positions with the Lanrick Group, a net worth
advisory firm. From 1995 to 1997, Mr. Hultquist served as Chief Operating
Officer and Director of Strategic Telecom Systems. From 1992 to 1995, Mr.
Hultquist served as Controller of Global Telemedia. From 1986 to 1991, Mr.
Hultquist served as Assistant Controller for Health Care REIT, Inc. Mr.
Hultquist holds a BBA in Accounting from the University of Toledo.
BRUCE THOMPSON became one of our directors in October 2000. Since 1970,
Mr. Thompson has served as President of First Toledo Corporation, an
owner-developer of assisted living facilities and manager of limited
partnerships with assisted living assets. From 1970 to 1995, he served as
Chairman and Chief Executive Officer of Health Care REIT, Inc., which owns and
finances operators of nursing and rehabilitation centers, mental health
facilities, retirement and assisted living complexes and allied health care
properties. Mr. Thompson received his B.A. from Yale University and received his
LLB and JD from the University of Virginia Law School. Mr. Thompson is a
director of Health Care REIT, Inc.
ED KIDSTON became one of our directors in October 2000. Mr. Kidston
graduated with a BSBA from Tri-State University in 1981. Since graduation, Mr.
Kidston has been employed with Artesian of Pioneer Inc. serving in numerous
capacities. In 1995, he became President and Chief Executive officer of Kidston
Family Companies, parent to several wholly owned companies, competing in the
business of Hotel/Motel ownership and management - municipal, industrial and
commercial water treatment systems - industrial development- residential, MDU,
and commercial real estate ownership and management, among others.
38
MEETINGS
During our fiscal year ending December 31, 2000 ("FISCAL 2000"), our
Board of Directors met on 8 occasions, the Audit Committee met on 1 occasion and
the Compensation Committee met on 1 occasion. Each incumbent director attended
at least 75% of the total number of meetings of the Board and Committees on
which he served.
COMMITTEES OF THE BOARD OF DIRECTORS
AUDIT COMMITTEE. Bruce Thompson and David Hultquist serve as the
members of our Audit Committee. The functions of the Audit Committee are
primarily to: (1) to provide advice to the Board of Directors in selecting,
evaluating or replacing outside auditors, (2) to review the fees charged by the
outside auditors for audit and non-audit services (3) to ensure that the outside
auditors prepare and deliver annually a Statement as to Independence, (4) to
meet with outside auditors to discuss the results of their examination and their
evaluation of internal controls and the overall qualify of financial reporting,
and (5) to meet with the outside auditors to discuss the scope of the annual
audit, to discuss the audited financial statements.
COMPENSATION COMMITTEE. Fenton Scruggs, David Hultquist and Edward
Kidston serve as the members of our Compensation Committee, which is responsible
for making recommendations to our Board of Directors regarding compensation
arrangements for our officers and for making recommendations to our Board of
Directors regarding the adoption of any employee benefit plans and the grant of
stock options or other benefits under such plans.
AUDIT COMMITTEE REPORT
The Audit Committee has reviewed and discussed with our independent
auditors the matters required to be discussed by SAS61. The Audit Committee has
received the written disclosures and the letter from the independent accountants
required by Independence Standards Board Standard No. 1, and has discussed with
the independent accountant the independent accountant's independence. Based on
these reviews and discussions, the Audit Committee recommended to the Board of
Directors that the audited financial statements be included in our Annual Report
on Form 10-KSB for the last fiscal year for filing with the SEC.
BRUCE THOMPSON
DAVID HULTQUIST
COMPENSATION OF DIRECTORS
IN 2000, our non-employee directors received $2,000 per calendar
quarter payable in shares of our common stock. In addition, our non-employee
directors received options to purchase 5,000 shares of our common stock at the
market price of our common stock on the last day of each calendar quarter.
IN 1999, our non-employee directors received $2,500 per calendar
quarter payable in shares of our common stock.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE. The following table sets forth the annual
and long-term compensation for services in all capacities for the fiscal years
ended December 31, 2000, 1999, and 1998 paid to Kenneth D. Van Meter, our
Chairman of the Board, President, and Chief Executive Officer ("NAMED EXECUTIVE
OFFICER"). No other executive officer received compensation exceeding $100,000
during the fiscal year ended December 31, 2000.
39
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG TERM COMPENSATION
----------------------------- ----------------------------------------------------------
AWARDS
RESTRICTED SECURITIES
STOCK UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS AWARD(S) OPTIONS COMPENSATION
-------------------------------- --------- ------------- -------- -------------- -------------- ---------------
Kenneth D. Van Meter 2000 $278,760(1) -- -- -- --
Chairman of the Board 1999 $170,100(2) -- -- -- --
Chief Executive Officer, and 1998 $170,100 -- -- 413,200(3) --
President
-------------------
(1) Includes $13,125 voluntarily deferred in 2000 and $96,185 paid in common
shares of Celerity.
(2) Includes $155,925 voluntarily deferred in 1999.
(3) Options repriced on December 1, 1998.
No options were granted to the Named Executive Officer during the
fiscal year ended December 31, 2000.
The following table sets forth certain information concerning the
number and value of securities underlying exercisable and unexercisable stock
options as of the fiscal year ended December 31, 2000 by the Named Executive
Officer.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL
YEAR-END OPTION VALUES
NUMBER OF SECURITIES
NUMBER OF UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
SHARES OPTIONS AT IN-THE-MONEY OPTIONS AT
ACQUIRED ON VALUE DECEMBER 31, 2000 DECEMBER 31, 2000
NAME EXERCISE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
-------------------------------------------------------------------------------------------------------------
Kenneth D. Van Meter -- -- 413,200 -0- -0- -0-
EMPLOYMENT AGREEMENT
KENNETH VAN METER. Our employment agreement with Mr. Van Meter, as
amended, expired January 20, 2000. Mr. Van Meter is currently employed by us
without such an agreement. Pursuant to his prior employment agreement, Mr. Van
Meter received an annual base salary of $162,000. The employment agreement
provided for the annual review of Mr. Van Meter's salary. In May 2000, our Board
of Directors approved an increase to Mr. Van Meter's base salary for 2000 to
$225,000 with a potential bonus of 200% of such salary. Retroactive salary
increases for 1998 and 1999 were also granted and were paid in shares of common
stock in June 2000 ($8,505 raise for 1998, paid as 8,000 shares; $8,930 raise
for 1999, paid as 10,338 shares).
Pursuant to his employment agreement (now expired), Mr. Van Meter may
have, at the discretion of our Board of Directors, received an annual incentive
bonus equal to up to 99% of Mr. Van Meter's base salary if he and Celerity
reached certain milestones. Up to two-thirds of such incentive bonus was to be
awarded and paid within thirty days following the end of each calendar year and
up to the remaining one third of such bonus was to be awarded at the end of each
calendar year and vest in two equal installments on the first and second
anniversaries of the date of the award.
In July 1997, Mr. Van Meter purchased 15,000 shares of common stock for
nominal consideration plus the cancellation of certain anti-dilution rights and
received options to purchase 183,200 shares of common stock at $1.38 per share
and options to purchase 230,000 shares of common stock at $3.00 per share. Such
options were repriced on December 1, 1998 at an exercise price of $0.688 per
share. Additionally, during 1997, Mr. Van Meter received reimbursement of
approximately $37,272 for expenses incurred as a result of his relocation.
40
STOCK OPTION PLANS
On August 10, 1995, the Board of Directors and stockholders adopted our
1995 Stock Option Plan (the "1995 PLAN"). The 1995 Plan provides for the grant
of options to purchase up to 178,929 shares of common stock to our employees and
officers. In August, 1997, our Board of Directors and the stockholders adopted
our 1997 Stock Option Plan. The 1997 Plan provides for the grant of options to
purchase up to 200,000 shares of common stock to our employees, directors, and
officers. In August 2001, the Board of Directors adopted our 2001 Equity
Incentive Plan. The 2001 Plan provides for the grant of options to purchase up
to 9,000,000 shares of common stock to our employees, consultants, directors and
officers. Options granted under the Plans may be either "incentive stock
options" within the meaning of Section 422A of the Internal Revenue Code of
1986, as amended (the "CODE"), or non-qualified options.
The Plans are administered by our Board of Directors which serves as
the stock option committee and which determines, among other things, those
individuals who receive options, the time period during which the options may be
partially or fully exercised, the number of shares of common stock issuable upon
the exercise of each option, and the option exercise price.
The exercise price per share of common stock subject to an incentive
stock option may not be less than the fair market value per share of common
stock on the date the option is granted. The per share exercise price of the
common stock subject to a non-qualified option may be established by our Board
of Directors, but may not be less than 85% of the fair market value of the
common stock on the date of the grant. The aggregate fair market value
(determined as of the date the option is granted) of common stock for which any
person may be granted incentive stock options which first become exercisable in
any calendar year may not exceed $100,000. No person who owns, directly or
indirectly, at the time of the granting of an incentive stock option to such
person, more than 10% of the total combined voting power of all classes of
capital stock of Celerity (a "10% STOCKHOLDER") shall be eligible to receive any
incentive stock options under the Plan unless the exercise price is at least
110% of the fair market value of the shares of common stock subject to the
option, determined on the date of grant.
No stock option may be transferred by an optionee other than by will or
the laws of descent and distribution and, during the lifetime of an optionee,
the option will be exercisable only by the optionee or a representative of such
optionee. In the event of termination of employment other than by death or
disability, the optionee will have no more than three months after such
termination during which the optionee shall be entitled to exercise the option,
unless otherwise determined by the stock option committee. Upon termination of
employment of an optionee by reason of death, such optionee's options remain
exercisable for one year thereafter to the extent such options were exercisable
on the date of such termination. Under the 1997 Plan, upon termination of
employment of an optionee by reason of total disability (as defined in the 1997
Plan) such optionee's options remain exercisable for one year thereafter.
Options under the 1995 Plan must be issued within 10 years from August
10, 1995, the effective date of the 1995 Plan. Options under the 1997 Plan must
be issued within 10 years from August 6, 1997, the effective date of the 1997
Plan. Options under the 2001 Plan must be issued within 10 years from August 23,
2001, the effective date of the 2001 Plan. Incentive stock options granted under
the Plans cannot be exercised more than 10 years from the date of grant.
Incentive stock options issued to a 10% Stockholder are limited to five-year
terms. Payment of the exercise price for options granted under the Plans may be
made in cash or, if approved by our Board of Directors, by delivery to us of
shares of common stock already owned by the optionee having a fair market value
equal to the exercise price of the options being exercised, or by a combination
of such methods. Therefore, an optionee may be able to tender shares of common
stock to purchase additional shares of common stock and may theoretically
exercise all of such optionee's stock options with no additional investment
other than the purchase of the original shares.
Any unexercised options that expire or that terminate upon an
employee's ceasing to be employed by us become available again for issuance
under the Plan from which they were granted.
On November 25, 1998, our Board of Directors approved a resolution
which permitted us to reprice all outstanding options to purchase common stock
which were held by employees as of December 1, 1998, to a price equal to the
closing of our common stock reported on the Nasdaq SmallCap Market on December
1, 1998. Such closing price on December 1, 1998 was $.688 per share.
401(K) PROFIT SHARING PLAN
We had a 401(k) profit sharing plan (the "401(K) PLAN"), pursuant to
which we, at our discretion each year, could make contributions to such plan
41
which match a certain percentage, as determined by us, of the contributions made
by each employee. We may elect not to make matching contributions to the 401(k)
Plan in any given year. We made no matching contributions in fiscal years 1998
or 1999 and terminated the plan during 1999.
EMPLOYEE SHARE PAYMENT PROGRAM
Under Celerity's Employee Share Payment Program, each employee may
elect to be paid up to 30% of his or her salary in shares of common stock in
lieu of cash compensation. For each employee making such election, Celerity will
issue such employee shares of common stock valued, at the time of issuance,
twice the amount of foregone cash compensation.
INDEMNIFICATION
Our Certificate of Incorporation provides that we will indemnify its
officers, directors, employees and agents to the fullest extent permitted by
Delaware law. Indemnitees are entitled to such indemnification in advance of any
final proceeding. Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Act") may be permitted to directors, officers and
controlling persons pursuant to the foregoing provisions, or otherwise, we have
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable.
42
DESCRIPTION OF PROPERTY
In December 1999, we have entered into a lease for a facility with
approximately 7,420 square feet of combined office and warehouse space at 122
Perimeter Park Drive, Knoxville, Tennessee. The term of the lease is from
January 15, 2000 to January 14, 2003, with an option to renew for two additional
three-year periods. Monthly lease payments average approximately $5,000 per
month plus utilities and certain other maintenance expenses. The property is in
good condition.
LITIGATION PROCEEDINGS
We have no pending litigation, other than a claim for non-payment of
printing expenses. The action was brought on January 30, 2001 and is pending
before Supreme Court of the State of New York, County of New York. In this
action, the plaintiff, Merrill/New York Company, has sued us for the non-payment
of financial printing fees and is seeking approximately $118,000 in damages,
plus interest and certain costs. We intend to defend the action vigorously.
In addition, certain creditors have threatened litigation if not paid.
We are seeking to make arrangements with these creditors. There can be no
assurance that any claims, if made, will not have an adverse effect on Celerity.
43
PRINCIPAL SHAREHOLDERS
BENEFICIAL OWNERS
COMMON STOCK. As of October 9, 2001, other than (i) the persons
identified in the following table and (ii) the directors and executive officers
identified in the table under "Directors and Executive Officers" section below,
no person owned beneficially more than five percent (5%) of our common stock.
PREFERRED STOCK. As of October 9, 2001, other than (i) the persons
identified in the following table and (ii) the directors and executive officers
identified in the table under "Directors and Executive Officers" section below,
no person owned beneficially more than five percent (5%) of our Series B
Preferred Stock.
As of October 9, 2001, other than the persons identified in the
following table, no person owned beneficially more than five percent (5%) of our
Series C Preferred Stock.
SHARES
BENEFICIALLY PERCENT
NAME AND ADDRESS TITLE OF CLASS OWNED OF CLASS(1)
--------------------------------------- ------------------------ ------------------ -------------------
Sui Wa Chau Common Stock 3,726,708 5.22%
c/o 122 Perimeter Park Drive
Knoxville, Tennessee 37922
Peter Che Nan Chen Common Stock 3,726,708 5.22%
c/o 122 Perimeter Park Drive
Knoxville, Tennessee 37922
RNI Limited Partnership Common Stock 10,054,428 12.94%
c/o 122 Perimeter Park Drive
Knoxville, Tennessee 37922
Lam King Shan Common Stock 3,726,708 5.2%
c/o 122 Perimeter Park Drive
Knoxville, Tennessee 37922
Yorkville Advisors, LLC Common Stock 6,000,000 8.15%
c/o 122 Perimeter Park Drive
Knoxville, Tennessee 37922
DKMT Co. Series B Preferred Stock 10(2) 10.5%
c/o 122 Perimeter Park Drive
Knoxville, Tennessee 37922
TKM Partnership Series B Preferred Stock 5(3) 5.3%
c/o 122 Perimeter Park Drive
Knoxville, Tennessee 37922
Cornell Capital Partners, LLC Series B Preferred Stock 7(4) 7.4%
521 Fifth Avenue, 17th Floor Common Stock 11,874,873 14.94%
New York, New York 10175
Mary Ellen Misiak Series B Preferred Stock 7(5) 7.4%
c/o 122 Perimeter Park Drive Common Stock 5,714,286 7.8%
Knoxville, Tennessee 37922
44
SHARES
BENEFICIALLY PERCENT
NAME AND ADDRESS TITLE OF CLASS OWNED OF CLASS(1)
--------------------------------------- ------------------------ ------------------ -------------------
William Murphy Series B Preferred Stock 5(6) 5.3%
c/o 122 Perimeter Park Drive Common Stock 7,246,377 9.7%
Knoxville, Tennessee 37922
Gerald Simpson Series B Preferred Stock 5(7) 5.3%
c/o 122 Perimeter Park Drive Common Stock 5,341,615 7.3%
Knoxville, Tennessee 37922
Dr. Rodney Conrad Series C Preferred Stock 0.5(8) 8.3%
c/o 122 Perimeter Park Drive
Knoxville, Tennessee 37922
Mike and Vicki Faucher Series C Preferred Stock 1.0(9) 16.7%
c/o 122 Perimeter Park Drive
Knoxville, Tennessee 37922
David Huntley Series C Preferred Stock 1.0(9) 16.7%
c/o 122 Perimeter Park Drive
Knoxville, Tennessee 37922
Debbie Huntley Series C Preferred Stock 1.0(9) 16.7%
c/o 122 Perimeter Park Drive
Knoxville, Tennessee 37922
Daniel Jinks Series C Preferred Stock 0.5(8) 8.3%
c/o 122 Perimeter Park Drive
Knoxville, Tennessee 37922
Edward Korn Series C Preferred Stock 1.0(9) 16.7%
c/o 122 Perimeter Park Drive
Knoxville, Tennessee 37922
Jordanna Wasilesku Series C Preferred Stock 1.0(9) 16.7%
c/o 122 Perimeter Park Drive
Knoxville, Tennessee 37922
-------------------
(1) Applicable percentage of common stock is based on 67,607,657 shares
outstanding, plus any securities convertible or exchangeable into
shares of common stock for the purpose of computing the percentage of
ownership of such person only, Series B Preferred Stock is based on 95
shares outstanding and Series C Preferred Stock is based on 6 shares
outstanding, all as of October 9, 2001.
(2) Convertible into 4,000,000 shares of common stock.
(3) Convertible into 2,000,000 shares of common stock.
(4) Convertible into 2,800,000 shares of common stock.
(5) Convertible into 2,800,000 shares of common stock.
(6) Convertible into 2,000,000 shares of common stock.
(7) Convertible into 2,000,000 shares of common stock.
(8) Convertible into 125,000 shares of common stock.
(9) Convertible into 250,000 shares of common stock.
45
DIRECTORS AND EXECUTIVE OFFICERS
The following table shows the amount of our capital stock beneficially
owned by our directors, the executive officers named in the Summary Compensation
Table below and by all directors and executive officers as a group as of October
9, 2001. Unless otherwise indicated, beneficial ownership is direct and the
person indicated has sole voting and investment power. As of October 9, 2001, we
had 67,607,652 shares of common stock outstanding, 95 shares of Series B
Preferred Stock outstanding (convertible into 38,000,000 shares of common stock)
and 6 shares of Series C Preferred Stock outstanding (convertible into 1,500,000
shares of common stock).
SHARES
BENEFICIALLY PERCENT
NAME AND ADDRESS TITLE OF CLASS OWNED OF CLASS(1)
------------------------------------ ------------------------------ ----------------- ------------------
Kenneth D. Van Meter Common Stock 2,917,013(2) 3.6%
122 Perimeter Park Drive
Knoxville, Tennessee 37922
David Hultquist Common Stock 1,032,146(3) 1.5%
122 Perimeter Park Drive Series B Preferred Stock 2(4) 2.1%
Knoxville, Tennessee 37922
Ed Kidston Common Stock 2,653,179(5) 3.9%
122 Perimeter Park Drive Series B Preferred Stock 5.34(6) 5.6%
Knoxville, Tennessee 37922
Fenton Scruggs Common Stock 553,105(7) *
122 Perimeter Park Drive
Knoxville, Tennessee 37922
Bruce Thompson Common Stock 1,036,146(8) 1.5%
3859 River Road Series B Preferred Stock 5.33(9) 5.6%
Toledo, Ohio 43614
All Officers and Directors as a Common Stock 8,191,589(10) 11.6%
Group Series B Preferred Stock 12.67(11) 13.4%
-------------------
* Less than 1%.
(1) Applicable percentage of ownership is based on 67,607,652 shares of
common stock outstanding and 95 shares of Series B Preferred Stock
outstanding as of October 9, 2001, together with applicable options for
each shareholder. Beneficial ownership is determined in accordance with
the rules of the Securities and Exchange Commission and generally
includes voting or investment power with respect to securities. Shares
of common stock subject to options that are currently exercisable or
exercisable within 60 days of October 9, 2001 are deemed to be
beneficially owned by the person holding such options for the purpose
of computing the percentage of ownership of such person, but are not
treated as outstanding for the purpose of computing the percentage
ownership of any other person.
(2) Includes options and warrants to purchase up to 413,200 and 78,129
shares of common stock, respectively. Excludes 21,032 shares of common
stock owned by Mr. Van Meter's adult children as to which he disclaims
beneficial ownership.
(3) Includes warrants to purchase up to 525,000 shares of common stock.
Excludes 200,000 shares of common stock owned by a trust for the
benefit of Mr. Hultquist's children as to which he disclaims beneficial
ownership.
(4) Convertible into 800,000 shares of common stock.
46
(5) All shares are held indirectly through Kidston Family Companies, a
limited liability company in which Mr. Kidston is a managing member,
Mr. Kidston's wife or in educational accounts for Mr. Kidston's
children. Includes warrants and options to purchase 1,020,000 shares of
common stock.
(6) Convertible into 2,133,360 shares of common stock.
(7) Includes options and warrants to purchase up to 27,389 and 21,198
shares of common stock, respectively.
(8) Includes warrants to purchase up to 1,000,000 shares of common stock.
(9) Convertible into 2,133,320 shares of common stock.
(10) Includes options and warrants to purchase up to 460,589 and 2,625,127
shares of common stock, respectively.
(11) Convertible into 7,068,000 shares of common stock.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
We are aware of the following instances since January 1, 2000, when an
executive officer, director or owner of more than ten percent of the outstanding
shares of our common stock failed to comply with reporting requirements of
Section 16(a) of the Securities Exchange Act of 1934:
o Kenneth D. Van Meter has failed to timely file a Form 4 in connection
with the issuance by us of 118,506 shares of our common stock in
January 2001. These shares of common stock were issued in lieu of cash
compensation for employment services rendered by Mr. Van Meter in
December 2000. Mr. Van Meter failed to timely file a Form 4 in
connection with the receipt of 229,736 shares of common stock on March
15, 2000.
o David Hultquist has failed to file a Form 4 in connection with the
issuance by us of 35,146 shares of our common stock in January 2001.
These shares of common stock were issued in lieu of cash compensation
for consulting services rendered by Mr. Hultquist in December 2000.
o Fenton Scruggs has failed to file a Form 4 in connection with the
issuance by us of 42,644 shares of our common stock and options to
purchase 5,000 shares of common stock in January 2001. These shares of
common stock and options were issued as director's compensation. Mr.
Scruggs failed to timely file a Form 4 in connection with the receipt
of 2,000 and 87,993 shares of common stock on March 2, 2000 and March
20, 2000, respectively.
47
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In conjunction with a loan to a third party in mid-1999, Dr. Fenton
Scruggs transferred approximately 278,000 tradeable shares of our common stock
into an escrow account for our benefit, the loan was repaid on December 1, 1999;
Dr. Scruggs' shares were subsequently released from escrow. Dr. Scruggs was
issued 55,583 shares of our common stock (20% of the number of shares he placed
into escrow) in January 2000 for the use of such shares.
In December 1999, David Hultquist, who subsequently became one of our
directors in October 2000, purchased 400,000 shares of common stock at the then
current market price. We previously registered 400,000 of such shares. We also
entered into a loan arrangement with Mr. Hultquist. Such arrangement provides
that in connection with loans made thereunder, we issued him a warrant to
purchase up to 200,000 shares of our common stock at the then current market
price which expires December 31, 2001.
We also entered into a consulting agreement with Mr. Hultquist for his
services payable in shares of our common stock (calculated monthly at a price
equal to the average for the most recent five trading days less 20%), plus the
issuance of one share of common stock per each dollar of fees. We have recorded
a $40,000 expense.
Several persons affiliated with us have permitted us to defer paying
them certain amounts we owe to them. Mr. Van Meter has permitted the deferral of
compensation payments, $70,875 in 1998, $204,515 in 1999 and $18,750 in 2000.
Mr. West permitted the deferral of payments of contractor fees, $2,500 in 1998
and $30,000 in 1999. Mr. Smith permitted the deferral of an aggregate of
compensation payments, $14,219 in 1998 and $73,149 in 1999. Mr. Smith also
permitted the payment deferral of $25,000 owed to him in connection with his
relocation in 1998. Mr. Chambers, a former officer and employee of Celerity,
permitted the deferral of compensation payments of $22,969 in 1998 and $54,687
in 1999. As of December 31, 1999, a total of $1,130,245 of compensation and fees
was deferred by current and former officers and employees, including the amounts
noted above.
Several persons affiliated with us have made cash loans to us. Mr. Van
Meter loaned us an aggregate of $550,000 during 1998 and aggregate of $17,219
during 1999 and made no loans to us during 2000. Dr. Scruggs loaned us $100,000
in 1998. Mr. Hultquist, a member of our Board of Directors, loaned us $70,000 in
the first quarter of 2000 (which was repaid in cash) and $125,000 in the second
quarter of 2000 which remains outstanding.
Except for the loans from Mr. Hultquist and approximately $147,000 of
compensation owed to former employees, none of the amounts owed described in
this section remain outstanding due to such persons' investments in the
transactions described in the following section.
In October 1998, we consummated a private placement (the "1998 ROYALTY
PLACEMENT") of $450,000, aggregate principal amount, 7% Notes due 1999 and 2001
("ROYALTY NOTES") in which subscribers were also entitled to received royalties
of $0.50 for each $100,000 invested (pro rated for lesser investments) for each
set top box sold over a period of five years or the total notes placed. Each of
Messrs. Van Meter and Smith and Dr. Scruggs, purchased Royalty Notes by the
cancellation of our indebtedness or canceling our obligation to pay them money,
the payment of which was then being deferred. The amounts of Royalty Notes
purchased were $50,000, $25,000 and $100,000 for Van Meter, Smith and Scruggs
respectively. William Chambers, then one of our officers, purchased a Royalty
Note in the Royalty Private Placement for $50,000.
In the second quarter of 2000, we consummated a private placement of
our common stock and warrants to purchase our common stock (the "SPRING 2000
PLACEMENT") in exchange for which we canceled some of our outstanding debt,
including Royalty Notes, and deferred payments of monies owed by some of our
creditors, including some of our current and former officers, directors and
employees. All investors in the private offering received shares of our common
stock with an aggregate value equal to the amount of debt canceled (calculated
at the average closing bid price of our common stock on the OTC bulletin board
for the five trading days prior to our acceptance of the respective subscription
agreement less twenty percent) plus warrants to purchase our common stock at the
rate of one share for each five dollars of debt canceled. Investors in the
spring 2000 Placement included Mr. Van Meter ($390,647); Mr. Smith ($96,352);
Dr. Scruggs ($109,991); Mr. Chambers ($130,889); and Mr. West ($40,481).
On March 5, 2001, we entered into a National Distributor Agreement for
the education market with Kidston Communications, a company controlled by Edward
Kidston, one of our directors. Pursuant to the terms of this Agreement, Kidston
Communications is the exclusive national distributor in the education market in
48
the United States. The term of the Agreement is through December 31, 2003 and
will automatically renew for additional three year periods unless one party
notifies the other of its intent not to renew at least 30 days prior to the end
of the then current term. The Agreement provides that Kidston Communications may
purchase our products from us at a five percent discount to list price, provided
that the price is not higher than the price paid by other customers for like
quantities of similar products and with similar terms and conditions. If Kidston
Communications exceeds its sales targets by at least thirty percent, then it
will receive an additional 5% discount to the list price. Sales targets will be
established annually by the parties by December 15 of the preceding year. For
all sales made in 2001, we will pay Kidston Communications a bonus of 5% to be
paid in shares of common stock.
In August 2001, Celerity issued 2,400,000 shares of common stock to
Artesian Direct Holdings Corporation in exchange for its commitment to purchase
$10 million of Celerity's products or to provide $10 million in financing. Ed
Kidston, a member of our Board of Directors, partially guaranteed Artesian
Direct's performance by agreeing to either (a) deliver to Celerity up to 2.4
million shares of Celerity common stock or (b) pay Celerity up to $750,000, if
Artesian failed to perform under the contract. This guarantee is provided in
proportion to the amount of Artesian Direct's commitment not fulfilled. That is,
if Artesian Direct has a $5 million shortfall, then Mr. Kidston would either
deliver 1.2 million shares to Celerity or pay Celerity $375,000. In connection
with this transaction, Mr. Kidston purchased 30% of the outstanding capital
stock of Artesian Direct and, therefore, Mr. Kidston is a shareholder of
Artesian Direct. Mr. Kidston is not an officer or director of Artesian Direct.
We believe that each of the above referenced transactions was made on
terms no less favorable to us than could have been obtained from and
unaffiliated third party. Furthermore, any future transactions or loans between
us and our officers, directors, principal stockholders or affiliates, and any
forgiveness of such loans, will be on terms no less favorable to us than could
be obtained from an unaffiliated third party, and will be approved by a majority
of our directors, including a majority of our independent and disinterested
directors who have access at our expense to our legal counsel.
49
MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S
COMMON EQUITY AND OTHER SHAREHOLDER MATTERS
Our common stock has been quoted on the Over-the-Counter Bulletin Board
maintained by the NASD since October 22, 1999 under the symbol "CLRT." Prior to
that, our common stock was quoted on the Nasdaq National Market under the symbol
"CLRT."
The following table sets forth the range of high and low bid quotations
for each calendar quarter for our common stock for the prior two years, as well
as the first three calendar quarters of 2001.
BID PRICE PER SHARE
----------------------------
HIGH LOW
----------------------------
January 4 - March 31, 1999 $1.3750 $0.7500
April 1 - June 30, 1999 $0.9375 $0.5000
July 1 - September 30, 1999 $1.3750 $0.3750
October 1 - December 31, 1999 $0.6250 $0.1300
January 3 - March 31, 2000 $2.0937 $0.7700
April 1 - June 30, 20000 $1.8750 $0.3125
July 1 - September 30, 2000 $1.3400 $0.5700
October 1 - December 31, 2000 $0.6100 $0.0450
January 1 - March 31, 2001 $0.2400 $0.0310
April 1 - June 30, 2001 $0.6200 $0.0960
July 1 - September 30, 2001 $0.2700 $0.0690
The above prices were obtained from Pink Sheets, LLC. The quotations
represent inter-dealer quotations, without retail mark-up, markdown or
commission, and may not necessarily represent actual transactions.
As of July 25, 2001, we believe there were approximately 200 holders of
record of our common stock.
We have not paid dividends in the past on any class of stock and we do
not anticipate paying dividends in the foreseeable future.
50
DESCRIPTION OF SECURITIES
AUTHORIZED CAPITAL STOCK. Our authorized capital stock consists of
250,000,000 of common stock and 3,000,000 shares of preferred stock.
COMMON STOCK. Each holder of common stock is entitled to one vote for
each share held on all matters submitted to a vote by our shareholders. The
holders of common stock vote together as a single class with the holders of
Series B Preferred Stock. As of October 9, 2001, we had 67,607,657 shares of
common stock outstanding.
PREFERRED STOCK. We are authorized to issue up to 3,000,000 shares of
our preferred stock in one or more series, with the rights, powers and
preferences to be designated from time to time by our Board of Directors.
SERIES B PREFERRED STOCK. In March 2001, our Board of Directors
authorized the issuance of up to 100 shares of Series B Preferred Stock. As of
October 9, 2001, we had 95 shares of Series B Preferred Stock outstanding. A
summary of the terms of the Series B Preferred Stock follows:
DIVIDENDS. The holders of Series B Preferred Stock are
entitled to receive in each fiscal year preferential dividends in cash at a rate
of 8% per year when and as declared by our Board of Directors. The holders are
also entitled to participate in any dividends declared on shares of our common
stock.
LIQUIDATION. Upon our liquidation, the holders of each share
of Series B Preferred Stock are entitled to receive, prior to any distribution
to any holders of common stock or any junior preferred stock, an amount equal to
the greater of (a) $10,000 per share (as adjusted for certain events), plus any
accrued but unpaid dividends or (b) the amount such holder would be entitled to
receive in such liquidation if the Series B Preferred Stock had been converted
into common stock.
REDEMPTION. On the second anniversary of the issuance of the
Series B Preferred Stock, we are obligated to redeem the Series B Preferred
Stock (to the extent of funds legally available for such purpose) from the
holders thereof. The redemption price is equal to $10,000 per share (as adjusted
for certain events), plus any accrued but unpaid dividends.
VOTING. The holders of the Series B Preferred Stock are
entitled to vote as a single class with the holders of common stock on an
as-converted basis. As such, the holders of the Series B Preferred Stock will be
entitled to 38,000,000 votes at any shareholders' meeting.
CONVERSION. At the holder's option, the holders of the Series
B Preferred Stock may convert their shares of Series B Preferred Stock into our
common stock at a conversion rate of $0.025 per share (as adjusted for certain
events). Upon conversion, all accrued but unpaid dividends will be forfeited. To
the extent that there is an insufficient number of shares of common stock
available, then the conversion period will be extended by the number of days
such shares of common stock were unavailable. As of October 9, 2001, we had 95
shares of Series B Preferred Stock outstanding, which are convertible into
38,000,000 shares of common stock.
SERIES C PREFERRED STOCK. In October 2001, our Board of Directors
authorized the issuance of up to 100 shares of Series C Preferred Stock. As of
October 9, 2001, we had 6 shares of Series C Preferred Stock outstanding. A
summary of the terms of the Series C Preferred Stock follows:
DIVIDENDS. The holders of Series C Preferred Stock are
entitled to receive in each fiscal year preferential dividends in cash at a rate
of 8% per year when and as declared by our Board of Directors. The holders are
also entitled to participate in any dividends declared on shares of our common
stock.
LIQUIDATION. Upon our liquidation, the holders of each share
of Series C Preferred Stock are entitled to receive, prior to any distribution
to any holders of common stock or any junior preferred stock, an amount equal to
the greater of (a) $10,000 per share (as adjusted for certain events), plus any
accrued but unpaid dividends or (b) the amount such holder would be entitled to
receive in such liquidation if the Series C Preferred Stock had been converted
into common stock.
51
REDEMPTION. On the second anniversary of the issuance of the
Series C Preferred Stock, we are obligated to redeem the Series C Preferred
Stock (to the extent of funds legally available for such purpose) from the
holders thereof. The redemption price is equal to $10,000 per share (as adjusted
for certain events), plus any accrued but unpaid dividends.
VOTING. The holders of the Series C Preferred Stock are
entitled to vote as a single class with the holders of common stock on an
as-converted basis. As such, the holders of the Series C Preferred Stock will be
entitled to 1,500,000 votes at any shareholders' meeting.
CONVERSION. At the holder's option, the holders of the Series
C Preferred Stock may convert their shares of Series C Preferred Stock into our
common stock at a conversion rate of $0.04 per share (as adjusted for certain
events). Upon conversion, all accrued but unpaid dividends will be forfeited. To
the extent that there is an insufficient number of shares of common stock
available, then the conversion period will be extended by the number of days
such shares of common stock were unavailable. As of October 9, 2001, we had 95
shares of Series C Preferred Stock outstanding, which are convertible into
1,500,000 shares of common stock.
OPTIONS. As of October 9, 2001, we had outstanding options to purchase
753,683 shares of common stock at a weighted average exercise price of $0.8611
per share. Of that total, options to purchase 567,612 shares of common stock
were vested.
WARRANTS. As of October 9, 2001, we had outstanding warrants to
purchase 1,853,814 shares of common stock. We are also obligated to issue to
Internet Finance warrants to purchase additional common stock if we receive
financing arranged by Internet Finance. For each $500,000 of capital received by
Celerity, Internet Capital will receive warrants to purchase 250,000 shares of
common stock at $0.15 per share. In addition to the warrants described above, we
issued to the Consultant under the Equity Line of Credit warrants to purchase
6,000,000 shares of common stock at an exercise price of $0.10 per share. The
holders of all warrants are entitled to registration rights.
Upon conversion of the Series B Preferred Stock, we will be obligated
to issue warrants to the holders of the Series B Preferred Stock. These
warrants, assuming all shares of Series B Preferred Stock are converted into our
common stock, would entitle the holders to purchase up to 4,600,000 shares of
common stock at an exercise price of $0.10 per share.
The weighted average exercise price of all warrants is $0.3208.
CONVERTIBLE DEBENTURES. As of October 9, 2001, we had issued
Convertible Debentures in the original principal amount of $4,501,000. These
Convertible Debentures are convertible into shares of our common stock at a
price equal to 75% of the average closing bid price of our common stock for the
five trading days immediately preceding conversion. If such conversion had taken
place on October 9, 2001, then the holders of the Convertible Debentures would
have received 75,016,667 shares of common stock. These Convertible Debentures
accrue interest at a rate of 4% per year and are convertible at the holder's
option. These Convertible Debentures have a term of five years. At Celerity's
option, these debentures may be paid in cash or converted into shares of common
stock on the fifth anniversary unless converted earlier by the holder.
TRANSFER AGENT AND REGISTRAR. American Stock Transfer & Trust Company
is the transfer agent and registrar for our common stock. Its address is 6201
Fifteenth Avenue, Brooklyn, New York 11219.
EXPERTS
The financial statements as of December 31, 2000 and 1999 and for each
of the two years in the period ended December 31, 2000 included in this
Prospectus have been so included in reliance on the report (which contains an
explanatory paragraph relating to Celerity's ability to continue as a going
concern as described in Note 3 to the financial statements) of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
LEGAL MATTERS
Kirkpatrick & Lockhart LLP, Miami, Florida, will pass upon the validity
of the shares of our common stock.
52
AVAILABLE INFORMATION
For further information with respect to us and the securities offered
hereby, reference is made to the Registration Statement, including the exhibits
thereto. Statements herein concerning the contents of any contract or other
document are not necessarily complete, and in each instance reference is made to
such contract or other statement filed with the Securities and Exchange
Commission or included as an exhibit, or otherwise, each such statement, being
qualified by and subject to such reference in all respects.
Reports, registration statements, proxy and information statements, and
other information filed by us with the Securities and Exchange Commission can be
inspected and copied at the public reference room maintained by the Securities
and Exchange Commission at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549, and at its regional offices located at 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661; and Seven World Trade Center, Suite
1300, New York, New York 10048. Copies of these materials may be obtained at
prescribed rates from the Public Reference Section of the Securities and
Exchange Commission at 450 Fifth Street, N.W., Room 1024, Washington, D.C.
20549. The Securities and Exchange Commission maintains a site on the World Wide
Web (HTTP://WWW.SEC.GOV) that contains reports, registration statements, proxy
and information statements and other information. You may obtain information on
the Public Reference Room by calling the Securities and Exchange Commission at
1-800-SEC-0330.
53
INDEX TO FINANCIAL STATEMENTS
CELERITY SYSTEMS, INC.
INTERIM CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
Balance Sheets as of June 30, 2001 and December 31, 2000..................F-1
Condensed Statements of Operations for the three and
six months ended June 30, 2001 and 2000..................................F-2
Condensed Statements of Cash Flows for the six months
ended June 30, 2001 and 2000.............................................F-3
Notes to Unaudited Condensed Financial Statements.........................F-4
ANNUAL FINANCIAL STATEMENTS (AUDITED)
Report of Independent Accountants.......................................F-8
Balance Sheets as of December 31, 2000 and 1999.........................F-9
Statements of Operations for the years ended
December 31, 2000 and 1999............................................F-10
Statements of Changes in Stockholders' Deficit
for the years ended December 31, 2000 and 1999........................F-11
Statements of Cash Flows for the years ended
December 31, 2000 and 1999............................................F-12
Notes to Financial Statements..........................................F-13
54
CELERITY SYSTEMS, INC.
Balance Sheets
June 30, 2001
(unaudited) December 31, 2000
------------- -----------------
Assets
Cash $ 54,453 $ 10,366
Accounts receivable 1,000 -
Inventory, net 1,746,685 400,157
----------------------------------------
Total current assets 1,802,138 410,523
Property and equipment, net 560,687 100,375
Debt offering costs, net of accumulated amortization of $67,914
and $257,263, respectively 160,240 41,215
Other assets 36,435 56,930
----------------------------------------
Total assets $ 2,559,500 $ 609,043
========================================
Liabilities, Redeemable Preferred Stock and Stockholders' Deficit
Accounts payable $ 1,496,430 $ 684,103
Accrued wages and related taxes 77,022 187,642
Accrued interest 182,954 151,499
Other accrued liabilities 216,618 176,925
Notes payable 107,766 92,943
Equity warrant liability (Notes 8 and 9) 1,137,874 -
Current maturities of long-term debt and capital lease obligations 482,500 570,000
----------------------------------------
Total current liabilities 3,701,164 1,863,112
Long-term debt and capital lease obligations, less current maturities 1,027,835 530,425
----------------------------------------
Total liabilities 4,728,999 2,393,537
Commitments and contingencies (Notes 7 and 8)
Series A convertible preferred stock, $.01 par value; authorized
50 shares; 0 and 13.715 shares issued and outstanding at
June 30, 2001 and December 31, 2000, respectively - 168,357
Series B convertible preferred stock, $.01 par value; authorized
100 shares; 100 and 0 shares issued and outstanding at
June 30, 2001 and December 31, 2000, respectively 144,334 -
Common stock, $.001 par value, 50,000,000 shares authorized,
49,858,464 issued and 49,521,100 outstanding, and 24,640,649
issued and 24,303,285 outstanding at June 30, 2001
and December 31, 2000, respectively 49,858 24,641
Additional paid-in capital 29,991,258 30,407,547
Equity placement fee (1,363,975) -
Treasury stock, at cost, 337,364 shares at June 30, 2001 and December 31, 2000 (227,500) (227,500)
Accumulated deficit (30,766,474) (32,157,539)
----------------------------------------
Total stockholders' deficit (2,316,833) (1,952,851)
----------------------------------------
Total liabilities, redeemable preferred stock and stockholders' deficit $ 2,559,500 $ 609,043
========================================
The accompanying notes are an integral part of these unaudited condensed financial statements.
F-1
CELERITY SYSTEMS, INC.
Condensed Statements of Operations
Unaudited
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- ----------------------------
2001 2000 2001 2000
------------- ------------- ------------- -------------
Revenues $ -- $ -- $ 2,400 $ --
Cost of revenues -- 685,313 3,240 685,313
------------- ------------- ------------- -------------
Gross margin -- (685,313) (840) (685,313)
Operating expenses 688,354 945,119 1,343,310 1,896,895
------------- ------------- ------------- -------------
Loss from operations (688,354) (1,630,432) (1,344,150) (2,582,208)
Interest expense (160,197) (572,010) (228,691) (746,053)
Income on equity warrant liability (Note 8) 491,048 -- 491,048 --
Other income 16,955 7,895 18,380 9,549
------------- ------------- ------------- -------------
Loss from continuing operations (340,550) (2,194,547) (1,063,415) (3,318,712)
Discontinued operations:
Income on disposal of discontinued CD-ROM segment -- (1,437) -- 36,311
Cumulative effect of change in accounting method
(Note 9) 2,598,813 -- 2,598,813 --
------------- ------------- ------------- -------------
Net income (loss) 2,258,263 2,195,983 1,535,400 (3,282,401)
Amortization of beneficial conversion feature and
accretion of redeemable convertible preferred stock
(Note 4) (113,706) -- (144,335) --
------------- ------------- ------------- -------------
Net income (loss) applicable to common -- --
shareholders $ 2,144,557 $ (2,195,983) 1,391,065 $ (3,282,401)
------------- ------------- ------------- -------------
Basic and diluted income (loss) per common shares
(Note 2):
Loss from continuing operations $ .01 $ (0.22) $ .02 $ (0.39)
Discontinued operations -- 0.00 -- 0.00
Cumulative effect of change in accounting method 0.05 0.00 0.05 0.00
------------- ------------- ------------- -------------
Net income (loss) per share to common shareholders $ .04 $ (0.22) $ .03 $ (0.39)
============= ============= ============= =============
The accompanying notes are an integral part of these unaudited condensed financial statements.
F-2
CELERITY SYSTEMS, INC.
Condensed Statements of Cash Flows
Unaudited
Six Months Ended June 30,
2001 2000
----------- ------------
Cash flows from operating activities:
Net income (loss) $ 1,535,400 $(3,282,401)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 160,682 398,894
Provision for inventory obsolescence -- 683,750
Noncash interest expense related to beneficial
conversion feature of debt 89,934 658,339
Noncash interest expense related to notes payable 36,860 -
Noncash operating expense related to consulting fees 3,721 468,750
Noncash operating expense related to payroll
and directors' fees 19,396 309,222
Noncash income related to settlement of capital lease obligation (97,500) -
Noncash income related to equity warrant liability (491,048) -
Noncash income related to change in accounting principle (2,598,813) -
Changes in current assets and liabilities:
Accounts receivable (1,000) 27,200
Prepaid expenses - 16,400
Inventory (1,346,528) (152,204)
Accounts payable 837,952 (420,670)
Other current liabilities (15,098) (526,322)
----------- ------------
Net cash used in operating activities (1,866,044) (1,819,042)
Cash flows from investing activities:
Purchase of fixed assets (491,370) (45,915)
----------- ------------
Net cash used in investing activities (491,370) (45,915)
Cash flows from financing activities:
Proceeds from short-term borrowings 15,000 130,000
Payments on short-term borrowings (15,000) (30,000)
Proceeds from long-term debt 1,800,000 1,179,980
Principal payments on long-term debt and capital lease obligations (60,000) (30,000)
Proceeds from issuance of common stock 30,000 1,060,000
Proceeds from exercise of common stock warrants - 136,100
Proceeds from exercise of common stock options - 2,775
Proceeds from Series B preferred stock and warrant offering, net of offering costs 859,654 -
Financing and debt issue costs (228,153) (134,980)
----------- ------------
Net cash provided by financing activities 2,401,501 2,313,875
Net increase in cash and cash equivalents 44,087 448,918
Cash and cash equivalents, beginning of period 10,366 383
----------- -----------
Cash and cash equivalents, end of period $ 54,453 $ 449,301
=========== ===========
The accompanying notes are an integral part of these unaudited condensed financial statements.
F-3
CELERITY SYSTEMS, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
1. PRESENTATION OF UNAUDITED INTERIM FINANCIAL STATEMENTS
The accompanying interim condensed financial statements and notes to
the financial statements for the interim periods as of June 30, 2001 and for the
three and six months ended June 30, 2001 and 2000, are unaudited. The
accompanying interim unaudited financial statements have been prepared by the
Company in accordance with generally accepted accounting principles for interim
financial statements and Item 310(b) of Regulation S-B. Accordingly, they do not
include all the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring items) considered
necessary for a fair presentation have been included. Operating results for the
six month period ended June 30, 2001, are not necessarily indicative of the
results that may be expected for the year ending December 31, 2001. The
condensed financial statements should be read in conjunction with the financial
statements and notes thereto included in the Annual Report on Form 10-KSB of the
Company as of and for the year ended December 31, 2000.
In June 1998, the FASB issued SFAS 133, Accounting for Derivative
Instruments and Hedging Activities, and in July 1999 issued SFAS 137 which
deferred the effective date of SFAS 133, as it pertains to the Company, to
fiscal year 2001. This statement has not had a material impact on the Company.
In July 2001, the FASB issued SFAS 141, Business Combinations, and SFAS
142, Goodwill and Other Intangible Assets. SFAS 141 requires that the purchase
method be used for business combinations initiated after June 30, 2001. SFAS 142
requires that goodwill no longer be amortized to earnings, but instead be
reviewed for impairment. The amortization of goodwill ceases upon adoption of
the Statement which will be January 1, 2002. Adoption of these statements has
not had a material impact on the Company.
The Company's financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the settlement
of liabilities and commitments in the normal course of business. The Company has
had recurring losses and continues to suffer cash flow and working capital
shortages. Additionally, the lack of sales or a significant financial commitment
raises substantial doubt about the Company's ability to continue as a going
concern.
The Company has focused on attempting to obtain the necessary capital
to maintain its operations. Additionally, the Company has narrowed its sales
efforts to those which, it believes, have the best chance of closing in the near
term. In the first half of 2001, the Company received gross proceeds from
private placements of convertible debt totaling $1,800,000 and Series B
Convertible Preferred Stock totaling $1,000,000 and received $30,000 from the
issuance of common stock. These funds enabled the Company to produce inventory
for its orders and to operate for the last few months. Management believes that
additional funds required for future operations will be available from the
$10,000,000 Equity Line of Credit Agreement established in June 2001. (Note 8)
2. INCOME (LOSS) PER SHARE
Basic and diluted income (loss) per share were computed by dividing net
loss applicable to common stock by the weighted average fully diluted common
shares outstanding during each period. Potential common equivalent shares are
not included in the computation of per share amounts in the periods because the
Company reported a loss from continuing operations and their effect would be
anti-dilutive.
F-4
Following is a reconciliation of the numerators and denominators of the
basic and diluted loss per share:
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------- --------------------------------
2001 2000 2001 2000
Income (loss)
Basic and diluted:
Income (loss) applicable to common
stockholders $2,144,557 $(2,195,983) $1,391,065 $(3,282,401)
Shares:
Basic and diluted:
Weighted-average common shares
outstanding 49,858,464 10,126,337 46,154,644 8,437,406
3. ISSUANCE OF CONVERTIBLE DEBENTURES
The Company issued $1,800,000 aggregate principal amount of 4%
convertible debentures in the first half of 2001 under its Equity Line of
Credit, resulting in net proceeds of approximately $1,642,000. The debentures
have a term of five years and are convertible into the Company's common stock at
a price, at the option of the holder, equal to 75% of the average closing bid
price of the common stock for the five trading days immediately preceding
conversion. The Company recognized a beneficial conversion feature for the
convertible debentures as a discount on the convertible debentures and as
additional paid-in capital. This discount of $729,524 will be amortized as a
non-cash interest expense over the five year period from the date of issuance to
the stated redemption date of the debentures.
4. ISSUANCE OF SERIES B REDEEMABLE CONVERTIBLE PREFERRED STOCK
In the first quarter of 2001, the Company consummated a private
placement of 23 shares of Series B Redeemable Convertible Preferred Stock
resulting in gross proceeds of $230,000. These shares provide for preferential
dividends at an annual rate of 8%. The preferred stock is convertible into
shares of common stock at a conversion price equal to $0.025 per share, subject
to availability, at any time during the two years following execution of the
subscription agreements. Should there be an insufficient number of shares of
common stock available at the time the preferred stock is offered for
conversion, the conversion period shall be extended by the number of days
between the conversion date and the date common shares become available. Two
years from the original issuance date, the Company shall offer to redeem such
preferred shares then outstanding at a price equal to the original issuance
price plus accrued dividends. The Company will record accretion up to the
redemption value until the redemption date. Accretion totaled $16,500 in the
second quarter of 2001 and $22,000 in the first half of 2001. Warrants to
purchase one share of common stock for each two shares of common stock issued
upon conversion of this tranche of Series B Preferred Stock were included. These
warrants are exercisable for a two year period following the date that the last
share of the Series B Redeemable Convertible Preferred Stock is converted into
common stock and have an exercise price of $0.10 per share. The Company
allocated $132,000 of the proceeds to the warrants based on their relative fair
value. The resulting $98,000 beneficial conversion feature of the preferred
stock will be reflected as a dividend over the two year period until the stated
redemption date of the stock. Amortization of this beneficial conversion feature
totaled $12,250 in the second quarter of 2001 and $16,333 in the first half of
2001.
The Company also consummated an additional private placement of 72
shares of Series B Redeemable Convertible Preferred Stock resulting in gross
proceeds of $720,000, and issued an additional 5 shares having a value of
$50,000 as payment for certain accounts payable and accrued wages. These shares
provide for preferential dividends at an annual rate of 8%. The preferred stock
is convertible into shares of common stock at a conversion price equal to $0.025
per share, subject to availability, at any time during the two years following
execution of the subscription agreements. The beneficial conversion feature of
$679,654 will be reflected as a dividend over the two year period until the
stated redemption date. Amortization of this beneficial conversion feature
totaled $84,957 in the second quarter of 2001 and $106,002 in the first half of
2001. Should there be an insufficient number of shares of common stock available
at the time the preferred stock is offered for conversion, the conversion period
shall be extended by the number of days between the conversion date and the date
common shares become available. Two years from the original issuance date the
F-5
Company shall offer to redeem such preferred shares then outstanding at a price
equal to the original issuance price plus accrued dividends. The Company will
record accretion up to the redemption value until the redemption date.
5. ISSUANCE OF COMMON STOCK
In the first quarter of 2001, the Company issued 1,000,000 shares of
common stock in a private placement for a value of $30,000.
6. SUPPLEMENTAL CASH FLOW INFORMATION
During the first half of 2001, the Company issued 427,946 shares of
common stock with a value of $23,116 as payment for certain consulting and
directors' fees and certain payroll expenses.
The Company also issued 5 shares of Series B convertible preferred
stock with a value of $50,000 as payment for certain accounts payable and
accrued wages.
Also during the first half of 2001, $617,023 of the convertible
debentures were converted into 19,656,665 shares of common stock.
Additionally, during the first half of 2001, $140,912 of the Series A
convertible preferred stock was converted into 4,360,203 shares of common stock.
Also during the first half of 2001, $38,860 of non-cash interest
expense was incurred relating to notes payable.
During the first half of 2000, the Company issued 624,275 shares of
common stock with a value of $766,038 as payment for certain consulting fees.
In the first half of 2000, $30,000 of the convertible debentures were
converted into 52,665 shares of common stock.
7. COMMITMENTS AND CONTINGENCIES
At June 30, 2001, the Company had issued 49,858,464 shares of common
stock with $3,275,122 aggregate principal and interest amount of convertible
debentures and Series B Preferred Stock outstanding. The Company has received
exercise notices for $363,650 of convertible debentures under which it is
obligated to issue an additional 12,364,281 shares of common stock.
Additionally, the Company would be obligated to issue an aggregate of 48,695,652
shares of common stock if all remaining holders converted or exercised all
outstanding securities convertible or exercisable into shares of common stock,
based upon the five day average closing price of $0.2760 as of June 30, 2001,
discounted to 75% of market price, or $0.2070. Sufficient shares of common stock
are not available for issuance upon conversion of the convertible securities or
upon exercise of outstanding options and warrants. While the Company has
scheduled a stockholders meeting for August 23, 2001 to obtain approval for an
increase in the number of authorized shares of common stock, it cannot currently
satisfy its obligations in respect to the issuance of additional shares of
common stock. To the extent the Company is unable to issue shares as required,
it will be in breach of its obligations under the terms of the outstanding
convertible securities agreements, and will incur liability for liquidated
damages of approximately $6,000 per month.
The Company is a defendant in a lawsuit brought by a financial printer
for non-payment of expenses. The action was brought on January 30, 2001 and is
pending before the Supreme Court of the State of New York, County of New York.
In this action, the plaintiff, Merrill/New York Company, has sued the Company
for the non-payment of financial printing fees and is seeking approximately
$118,000 in damages, plus interest and certain costs. The Company intends to
defend the action vigorously.
F-6
In addition, certain creditors have threatened litigation if not paid.
The Company is seeking to make arrangements with these creditors. There can be
no assurance that any claims, if made, will not have an adverse effect on the
Company.
8. EQUITY LINE OF CREDIT
In April 2001, the Securities and Exchange Commission ("SEC") issued an
interpretation regarding Equity Line Financings. This Interpretation modified
the criteria required to register the shares of common stock issued upon
conversion of the related debentures. The Company entered into a Line of Credit
Agreement that expires on October 31, 2001, under which a maximum amount of
$10,000,000 of debentures may be issued. As of June 30, 2001, the Company had
drawn $2,795,000 under the Line of Credit. As a result of this SEC
Interpretation, the terms of this Line of Credit Agreement do not meet the
criteria for registration of the common stock which would be issued upon
conversion of these debentures.
On June 14, 2001, the Company entered into an Equity Line of Credit
pursuant to which the Company may, at its discretion, periodically sell to the
Investor shares of common stock for a total purchase price of up to $10.0
million. For each share of common stock purchased under the Equity Line of
Credit, the Investor will pay 82% of the average of the 5 lowest closing bid
prices on which our common stock is traded for the 10 days immediately following
the notice date. The amount of each advance is subject to a maximum advance
amount based on an average daily volume of the Company's common stock. A
consulting fee of 10% of each advance will be paid to the agent upon closing
each of the sales under this agreement. The consultant received warrants to
purchase 3,500,000 shares of common stock at an exercise price of $0.10. The
$1,530,000 fair value of these warrants was recorded as a cost of the
transaction. These warrants expire in June 2006. In accordance with EITH 00-19,
the Company has recorded an Equity Warrant Liability of $1,363,975 in connection
with these warrants. As these warrants cannot be exercised until the
shareholders approve an increase in the number of authorized capital stock the
Company has recorded a mark-to-market adjustment of $491,048, which has been
reflected as Income on equity warrant liability.
9. CHANGE IN ACCOUNTING PRINCIPLE
Effective June 30, 2001, the Company adopted the provisions of EITF
00-19, "Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company's Own Stock". This issue provides that
warrants to purchase common shares which are outstanding and for which the
number of authorized but unissued shares is insufficient to satisfy the maximum
number of shares that could be required upon the exercise of such warrants, then
the contract is reclassified from equity to an asset or liability. The effect of
the application of this pronouncement that requires asset or liability
classification for those contracts that existed as of September 20, 2000, would
be calculated as of June 30, 2001, and presented on that date as a cumulative
effect of a change in accounting principle. At June 30, 2001, $2,863,760 was
reclassified from equity to a liability and a mark-to-market adjustment of
$2,598,813 was recorded as the cumulative effect of a change in accounting
principle.
F-7
Report of Independent Accountants
To the Board of Directors and Shareholders of
Celerity Systems, Inc.:
In our opinion, the accompanying balance sheets and the related statements of
operations, changes in stockholders' equity (deficit) and of cash flows present
fairly, in all material respects, the financial position of Celerity Systems,
Inc. (the "Company") at December 31, 2000 and 1999, and the results of its
operations and its cash flows for each of the two years in the period ended
December 31, 2000 in conformity with accounting principles generally accepted in
the United States of America. These financial statements are the responsibility
of the Company's management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America, which 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, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 3 to the
financial statements, the Company has a working capital deficit of $1,452,589
and has suffered recurring losses from operations and net operating cash
outflows that raise substantial doubt about its ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note 3. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ PricewaterhouseCoopers LLP
--------------------------------
PricewaterhouseCoopers LLP
Knoxville, Tennessee
March 14, 2001, except as to Note 16 for which
the date is March 30, 2001
F-8
CELERITY SYSTEMS, INC.
Balance Sheets
December 31, 2000 and 1999
2000 1999
-------------- --------------
Cash $ 10,366 $ 383
Accounts receivable - 31,500
Other receivables - 28,000
Inventory, net 400,157 854,353
Prepaid expenses - 24,000
-------------- --------------
Total current assets 410,523 938,236
Property and equipment, net 100,375 104,686
Debt offering costs, net of accumulated amortization of $257,263
and $134,894 respectively 41,215 76,629
Other assets 56,930 109,186
-------------- --------------
Total assets $ 609,043 $ 1,228,737
============== ==============
Liabilities, Redeemable Preferred Stock and Stockholders' Deficit
Accounts payable $ 684,103 $ 984,341
Accrued wages and related taxes 187,642 1,209,639
Accrued interest 151,499 224,622
Other accrued liabilities 176,925 309,513
Notes payable 92,943 557,252
Current maturities of long-term debt and capital lease obligations 570,000 401,173
-------------- --------------
Total current liabilities 1,863,112 3,686,540
Long-term debt and capital lease obligations, less current maturities 530,425 904,280
-------------- --------------
Total liabilities 2,393,537 4,590,820
Commitments and contingencies (Notes 3, 8, 10, 11 and 15) - -
Series A convertible preferred stock, $.01 par value; authorized
50 shares; 13.715 and 0 shares issued and outstanding at December
31, 2000 and 1999, respectively (aggregate liquidation value at
December 31, 2000 of $140,300) 168,357 -
Common stock, $.001 par value, 50,000,000 shares authorized,
24,640,649 issued and 24,303,285 outstanding, and 6,269,521
issued and 5,932,157 outstanding at December 31, 2000 and
1999, respectively 24,641 6,270
Additional paid-in capital 30,407,547 23,695,245
Treasury stock, at cost, 337,364 shares at December 31,
2000 and 1999 (227,500) (227,500)
Accumulated deficit (32,157,539) (26,836,098)
-------------- --------------
Total stockholders' deficit (1,952,851) (3,362,083)
-------------- --------------
Total liabilities, redeemable preferred stock and $ 609,043 $ 1,228,737
stockholders' deficit ============== ==============
The accompanying notes are an integral part of these financial statements
F-9
CELERITY SYSTEMS, INC.
Statements of Operations
For the years ended December 31, 2000 and 1999
2000 1999
------------- -------------
Revenues $ - $ 85,894
Cost of revenues 717,755 366,495
------------- -------------
(717,755) (280,601)
Operating expenses 3,666,014 3,582,245
Loss on disposal of fixed assets - 1,085,474
------------- -------------
Loss from operations (4,383,769) (4,948,320)
Interest expense (930,740) (537,865)
Other (expense) income (8,084) 51,199
------------- -------------
Loss from continuing operations (5,322,593) (5,434,986)
Discontinued operations:
Income on disposal of discontinued CD-ROM segment (Note 4) 35,094 26,830
------------- -------------
Net loss (5,287,499) (5,408,156)
Amortization of beneficial conversion feature of Series A
redeemable coble preferred-stock (Note 11) 33,942 -
Accretion of redeemable preferred stock (Note 11) 298,966 -
------------- -------------
Net loss applicable to common stockholders $ (5,620,407) $(5,408,156)
============= =============
Basic and diluted loss per common share (Note 13):
Loss from continuing operations $ (0.49) $ (1.07)
Discontinued operations - 0.01
------------- -------------
Net loss per share $ (0.49) $ (1.06)
============= =============
The accompanying notes are an integral part of these financial statements
F-10
CELERITY SYSTEMS, INC.
Statement of Changes in Stockholders' Deficit
For the years ended December 31, 2000 and 1999
Shares of Common Additional Treasury Accumulated
Common Stock Stock Paid-In Capital Stock Deficit
Balances, December 31, 1998 4,748,847 $ 4,749 $ 22,626,174 $ (227,500) $ (21,427,942)
Exercise of employee stock options 28,800 29 2,851
Issuance of common stock 200,000 200 39,800
Issuance of convertible debentures with
beneficial conversion feature 375,935
Issuance of common stock warrants 111,605
Conversion of accounts and notes payable to
common stock 1,291,874 438 379,734
Conversion of convertible debentures to shares of
common stock - 854 159,146
Net loss (5,408,156)
------------- ----------- ------------- ----------- --------------
Balances, December 31, 1999 6,269,521 6,270 23,695,245 (227,500) (26,836,098)
Issuance of common stock 1,700,000 1,700 1,058,300
Issuance of common stock warrants with short-term
note 75,589
Issuance of common stock warrants with Series A
Preferred Stock 202,800
Exercise of common stock warrants 177,500 178 135,923
Exercise of employee stock options 87,500 87 51,844
Issuance of convertible debentures with beneficial
conversion feature 651,104
Issuance of common stock as payment of certain
consulting and directors' fees, payroll and
accounts payable items 814,255 814 942,440
Conversion of notes, accounts payable and wages to
shares of common stock and warrants to purchase
357,464 shares of common stock 1,503,738 1,504 1,781,908
Conversion of accounts payable to common stock 383,586 384 207,706
Conversion of convertible debentures to shares of
common stock 9,009,096 9,009 1,597,599
Conversion of convertible preferred stock to
shares of common stock 4,695,453 4,695 272,113
Issuance of convertible preferred stock with
beneficial conversion feature 33,942 (33,942)
Accretion of redeemable preferred stock (298,966)
Net loss (5,287,499)
------------- ----------- ------------- ----------- --------------
Balances, December 31, 2000 24,640,649 $ 24,641 $30,407,547 $ (227,500) $ (32,157,539)
============= =========== ============= =========== ==============
The accompanying notes are an integral part of these financial statements
F-11
CELERITY SYSTEMS, INC.
Statements of Cash Flows
For the years ended December 31, 2000 and 1999
2000 1999
Cash flows from operating activities:
Net loss $ (5,287,499) $ (5,408,156)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 280,187 665,418
Loss on disposal of fixed assets - 1,085,474
Provision for inventory obsolescence 683,750 354,523
Noncash interest expense related to beneficial
conversion feature of debt 712,550 285,235
Noncash interest expense related to notes payable 22,234 -
Noncash stock-based compensation 259,534 -
Noncash operating expense related to consulting fees 578,125 -
Noncash operating expense related to payroll
and directors' fees 365,129 -
Changes in current assets and liabilities:
Accounts receivable 31,500 248,815
Prepaid expenses 24,000 39,150
Inventory (229,554) (2,265)
Accounts payable (43,728) 542,700
Other current liabilities (413,053) 950,245
-------------- -------------
Net cash used in operating activitities (3,016,825) (1,238,861)
Cash flows from investing activities:
Purchase of fixed assets (48,567) -
Issuance of short-term note receivable - (50,000)
Collection of short-term note receivable - 22,000
Investments in other assets - (20,900)
-------------- -------------
Net cash used in investing activitities (48,567) (48,900)
Cash flows from financing activities:
Proceeds from short-term borrowings 200,000 677,253
Payments on short-term borrowings (100,000) (125,000)
Proceeds from long-term debt 1,634,980 914,980
Principal payments on long-term debt and capital
lease obligations (90,000) (28,719)
Proceeds from issuance of common stock 1,060,000 40,000
Proceeds from exercise of common stock warrants 136,101 -
Proceeds from exercise of common stock options 2,775 2,880
Proceeds from Series A preferred stock offering,
net of offering costs 369,000 -
Financing and debt issue costs (137,481) (211,523)
-------------- -------------
Net cash provided by financing activitities 3,075,375 1,269,871
Net increase (decrease) in cash and cash equivalents 9,983 (17,890)
Cash and cash equivalents, beginning of year 383 18,273
-------------- -------------
Cash and cash equivalents, end of year $ 10,366 $ 383
============== =============
The accompanying notes are an integral part of these financial statements
F-12
CELERITY SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND NATURE OF BUSINESS
Celerity Systems, Inc. (the "Company"), a Delaware corporation,
designs, develops, integrates, installs, operates and supports
interactive video services hardware and software ("interactive video").
The Company also designed, developed, installed, and supported CD-ROM
software products for business applications. In February, 1998 the
Company began to scale back the CD-ROM segment to a maintenance mode of
operations and in February, 2001 completed the sale of this segment
(Note 4). In the interactive video services area, the Company seeks to
provide solutions, including products and services developed by the
Company and by strategic partners, that enable interactive video
programming and applications to be provided to a wide variety of market
niches. The sales of interactive video products are principally made on
a contract basis.
The Company had no revenues in 2000. The Company had one
interactive video customer that represented approximately 50% of the
Company's revenues in 1999. Export sales represented 35% of revenues
for 1999.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS - The Company considers all highly
liquid debt instruments with an original maturity of three months or
less when purchased as cash equivalents. The Company places its
temporary cash investments principally in bank repurchase agreements,
money market accounts and certificates of deposit with one bank. The
Company does not obtain collateral on its investment or deposit
accounts.
ACCOUNTS RECEIVABLE - The Company does not require collateral or
other security to support customer receivables.
INVENTORY - Inventory is stated at the lower of cost or market,
with cost being determined using the first-in, first-out (FIFO) method.
REVENUE RECOGNITION - Long-term contracts related to the
Company's interactive video segment are accounted for under the
percentage of completion method as these contracts extend over
relatively long periods of time. The Company measures the percentage
complete by contract based upon the costs incurred to date in relation
to the total estimated costs for each contract. Costs are charged to
contracts as incurred based upon material costs, hours dedicated to the
contract, and allocations of overhead costs based on predetermined
overhead rates.
The Company records sales of products not under contract when all
risks and rewards of ownership of the related products has passed to
the buyer.
In December 1999, the Securities and Exchange Commission ("SEC")
issued Staff Accounting Bulletin No. 101, or SAB 101, Revenue
Recognition in Financial Statement, which provides guidance on the
recognition, presentation and disclosure of revenue in financial
statements filed with the SEC. SAB 101 outlines the basic criteria that
must be met to recognize revenue and provides guidance for disclosures
related to revenue recognition policies. It was effective for the
fourth fiscal quarter of fiscal years beginning after December 15,
1999. This statement did not have a material impact on the Company.
PROPERTY AND EQUIPMENT - Property and equipment are stated at
cost. Depreciation is computed using the straight-line method over the
estimated useful lives of the underlying assets, generally five years.
Routine repair and maintenance costs are expensed as incurred. Costs of
major additions, replacements and improvements are capitalized. Gains
and losses from disposals are included in income. The Company
periodically evaluates the carrying value by considering the future
cash flows generated by the assets. Management believes that the
F-13
carrying value reflected in the financial statements is fairly stated
based on this criteria.
DEBT OFFERING COSTS - Debt offering costs are related to private
placements in 2000 and 1999, are being amortized on a straight line
basis over the term of the related debt. Amortization expense related
to these costs was $204,894 and $134,894 in 2000 and 1999 respectively.
RESEARCH AND DEVELOPMENT COSTS - Research and development costs
are expensed as incurred and amounted to $-0- and $90,498 for the years
ended December 31, 2000 and 1999, respectively. These amounts are
included in operating expenses in the accompanying statements of
operations.
INCOME TAXES - The Company accounts for income taxes using the
asset and liability method, whereby deferred tax assets and liabilities
are determined based upon the differences between financial reporting
and tax bases of assets and liabilities and are measured using the
enacted tax rates and laws that will be in effect when the differences
are expected to reverse.
STOCK BASED COMPENSATION - On January 1, 1996, the Company
adopted SFAS 123, Accounting for Stock Based Compensation. As permitted
by SFAS 123, the Company has chosen to apply APB Opinion No. 25,
Accounting for Stock Issued to Employees (APB 25) and related
interpretations in accounting for its Plans. The pro forma disclosures
of the impact of SFAS 123 are described in Note 12 of the financial
statements.
In April 2000, the Financial Accounting Standards Board issued
FASB Interpretation No. 44 (FIN 44) which clarifies the application of
Accounting Principles Board Opinion 25 for certain transactions. The
interpretation addresses many issues related to granting or modifying
stock options including changes in accounting for modifications of
awards (increased life, reduction of exercise price, etc.). It was
effective July 1, 2000 but certain conclusions cover specific events
that occurred after either December 15, 1998 or January 12, 2000. The
effects of applying the interpretation are to be recognized on a
prospective basis from July 1, 2000. The adoption of FIN 44 did not
have a material impact on the Company.
ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying amount of cash
and cash equivalents, accounts receivable, accounts payable and accrued
expenses approximates fair value because of the short maturity of those
instruments. The carrying value of the Company's long-term debt
approximates fair value because it bears interest at rates that are
similar to current borrowing rates for loans of comparable terms,
maturity and credit risk that are available to the Company.
IMPACT OF SFAS 133 - In June 1998, the Financial Accounting
Standards Board (FASB) issued SFAS 133, Accounting for Derivative
Instruments and Hedging Activities and in July 1999 issued SFAS 137
which deferred the effective date of SFAS 133, as it pertains to the
Company, to fiscal year 2001. This Standard is not expected to have a
material impact on the Company.
3. GOING CONCERN
The Company's financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the
settlement of liabilities and commitments in the normal course of
business. The Company has had recurring losses and continues to suffer
cash flow and working capital shortages. These factors taken together
with the lack of sales and the absence of significant financial
commitment raises substantial doubt about the Company's ability to
continue as a going concern.
F-14
In the first quarter of 2001, the Company received gross proceeds
from private placements of convertible debt totaling $1,790,000 and
Series B Convertible Preferred Stock totaling $742,000 and received
$30,000 from the issuance of common stock. These funds should enable
the Company to produce inventory for its orders and to operate for the
next few months, however, additional financing will be necessary to
sustain our operations and achieve our business plan. The Company is
attempting to obtain such additional financing. Management is also
actively seeking one or more strategic investors. The Company has also
signed contracts to deploy its end-to-end interactive television system
in three multi-family properties totaling 749 units and has received an
order to provide its Digital Education System to an Ohio school.
However, there can be no assurance as to the receipt or timing of
revenues from operations including revenues from these contracts or
that management will be able to find a strategic investor or secure the
additional financing necessary to sustain operations or achieve its
business plan.
4. DISCONTINUED SEGMENT
In February 1998, the Company decided to scale back its CD-ROM
segment to a maintenance mode of operations. The Company developed a
formal plan of disposal that became effective in May 1998. The segment
had revenues of $70,070 and $174,209 in 2000 and 1999, respectively. In
February, 2001 the Company sold the assets of its CD-ROM segment for 20
preferred shares of the buyer, which are convertible to common shares
on a scheduled basis over a two-year period. As the Company had written
the assets of this segment down to zero, and the fair value of the
shares of the buyer is not currently determinable, no gain or loss on
this sale was recorded.
5. INVENTORY
Inventory at December 31, 2000 and 1999, consists of:
2000 1999
Raw materials $1,120,004 $ 924,890
Finished goods 34,440 -0-
---------- ----------
1,154,444 924,890
Reserve for inventory obsolescence (754,287) (70,537)
---------- -----------
$ 400,157 $ 854,353
========== ===========
During 2000 and 1999, the Company wrote inventory down to an
estimated net realizable value. This write down amounted to $683,750
and $354,523 in 2000 and 1999, respectively. The write down in 2000
came as the result of an agreement with another entity to manufacture
the Company's updated line of digital video servers.
6. PROPERTY AND EQUIPMENT
Substantially all property and equipment of the Company is
comprised of computers and computer-related equipment, therefore, all
property and equipment is included in one category entitled "Property
and equipment, net." Cost and related accumulated depreciation for
December 31, 2000 and 1999, are as follows:
2000 1999
Property and equipment $ 272,304 $ 223,737
Accumulated depreciation (171,929) (119,051)
----------- -----------
Property and equipment, net $ 100,375 $ 104,686
=========== ===========
As part of the downsizing efforts during 1999, the Company
negotiated to release its current facility and relocate to a smaller
site. This relocation took place in January 2000. As result of this
F-15
relocation, certain leasehold improvements were abandoned and furniture
recorded as part of a capitalized lease was returned. The Company
recorded a loss in 1999 on disposal related to these assets as well as
certain computer equipment totaling $1,085,474. Depreciation expense in
2000 and 1999 was $52,877 and $507,205, respectively.
7. INCOME TAXES
The tax effects of temporary differences giving rise to the
Company's deferred tax assets (liabilities) at December 31, 2000 and
1999, are as follows:
2000 1999
Current:
Accrued wages $ -- $ 459,000
Inventory reserve 286,000 26,000
Relocation reserve -- 84,000
Other 56,000 23,000
------------ ------------
342,000 592,000
Valuation allowance for net current deferred tax assets (342,000) (592,000)
------------ ------------
Total net current deferred tax asset $ -- $ --
============ ============
Noncurrent:
Net operating loss and research credit carryfowards $ 10,717,000 $ 8,429,000
Stock based compensation 879,000 937,000
Property and equipment (5,000) 26,000
------------ ------------
11,591,000 9,392,000
Valuation allowance for net noncurrent
deferred tax assets (11,591,000) (9,392,000)
------------ ------------
Total net noncurrent deferred tax asset $ -- $ --
============ ============
As a result of significant historical pretax losses, management
can not conclude that it is more likely than not that the deferred tax
asset will be realized. Accordingly, a valuation allowance has been
established against the total net deferred tax asset.
In 2000 and 1999, income tax expense allocated to discontinued
operations was $13,000 and $10,000 respectively. The Company recorded a
full valuation allowance for this item.
The Company's income tax benefit differs from that obtained by
using the federal statutory rate of 34% as a result of the following:
2000 1999
Computed "expected" tax (benefit) $ (1,798,000) $ (1,839,000)
State income tax (benefit), net of federal income tax benefit (209,000) (216,000)
Change in valuation allowance 1,949,000 2,005,000
Permanent differences and other 58,000 50,000
-------------- --------------
$ -- $ --
============== ===============
At December 31, 2000, the Company has approximately $28,150,000
of net operating loss carryforwards which in certain circumstances
could become limited due to a change in control. These amounts are
available to reduce the Company's future taxable income and expire in
the years 2010 through 2015.
F-16
8. COMMON STOCK WARRANTS
1996 WARRANTS
In the second quarter of 1996, the Company sold units in a
private placement offering to outside investors. In connection with
this placement, the agent received warrants to purchase 35,556 shares
of common stock at $10.31 per share. The 1998, 1999 and 2000
convertible debenture issuances triggered the antidilution provisions
of the 1996 warrant agreement. An additional 11,952 warrants have been
issued and the exercise price has been lowered to $7.72. These warrants
expire in July 2002.
1997 WARRANTS
In August 1997, the Company issued warrants to purchase 320,000
shares of common stock at $3.00 per share in connection a private
placement. The 1998, 1999 and 2000 convertible debenture issuances also
triggered the antidilution provisions of the 1997 warrant agreement. An
additional 70,240 warrants have been issued and the exercise price has
been lowered to $2.46. These warrants expire in August 2001.
In November 1997, the Company issued warrants to purchase 200,000
shares of common stock at $9.00 per share in connection with its
initial public offering. These warrants expire in November 2002.
1999 WARRANTS
In the first quarter 1999, the Company placed $600,000 of 9%
convertible debentures (Note 10). In connection with this placement,
the agent received warrants to purchase 100,000 shares of common stock
at $1.00 per share. The Company recorded loan cost and additional paid
in capital for the $36,605 fair value of these warrants to be amortized
over the life of the related debt.
In June 1999, the Company received $500,000 in bridge financing.
In connection with this placement, the agent received warrants to
purchase 100,000 shares of common at $1.50 per share which were
repriced to $0.94 per share in April 2000. The Company recorded loan
cost and additional paid in capital for the $16,300 for the fair value
of the repricing of these warrants to be amortized over the life of the
related debt. These warrants expire in April 2003.
In October and November 1999, the Company placed $110,000 and
$204,980 of 4% and 8% convertible debentures, respectively. In
connection with these placements, the agent received warrants to
purchase 250,000 shares of common stock at $0.586 per share. The
Company recorded loan cost and additional paid in capital for the
$75,000 fair value of these warrants to be amortized over the life of
the related debt. These warrants expire in September 2002.
In December 1999, the Company issued warrants to purchase 200,000
shares of common stock at $0.20 per share in connection with a private
placement. These warrants were exercised in January, 2000.
2000 WARRANTS
In the first half of 2000, the Company issued warrants to
purchase 357,464 shares of common stock at prices ranging from $0.744
to $1.625 in connection with a private placement of common stock (Note
9). These warrants expire at various dates between April and June 2003.
F-17
In April 2000, the Company received $125,000 in short-term
financing from an individual who later became a member of the Board of
Directors (Note 10). In connection with this note, the individual
received a warrant to purchase 125,000 shares of common at $0.20 per
share. The Company allocated $59,291 of the net proceeds to the
warrants based on their relative fair value by recording debt discount
and additional paid in capital. These warrants expire in April 2002.
In August 2000, the Company placed $410,000 of series A
convertible preferred stock. In connection with this placement, the
agent received warrants to purchase 360,000 shares of common stock at
$0.70 per share. The $202,800 fair value of these warrants was recorded
as a cost of the offering. These warrants expire in August 2002.
9. ACCOUNTS, NOTES AND WAGES CONVERSION
In the first half of 2000, the Company converted $1,783,412 of
outstanding notes, accounts payable and wages into common stock upon
the initial closing of a private offering. Investors in the private
offering received 1,503,738 shares of the Company's common stock,
calculated at the average closing bid price of the common stock for the
five days immediately prior to acceptance of the investor's
subscription agreement less twenty percent. In addition, investors
received warrants to purchase common stock at the rate of one warrant
for each five dollars of liabilities converted (Note 8).
10. NOTES PAYABLE, LONG TERM DEBT AND EQUITY LINE OF CREDIT
NOTES PAYABLE
In 1999, the Company's President advanced $27,252 to the Company.
This note was non-interest bearing. Also during 1999, $30,000 was
advanced from an inventory supplier to fund purchases required for a
specific customer order. This note was due, plus interest of $15,000,
upon receipt of the funds from the specified customer. Also, bridge
financing was obtained in the amount of $500,000. This financing had a
term of 120 days and provided for interest of $100,000. At December 31,
2000 and 1999, $-0- and $557,252 was outstanding, respectively.
In April 2000, the Company received $195,000 from an individual
who later became a member of the Company's Board of Directors. The note
is due in April 2002 and bears interest at 9%. In addition, warrants
were issued with a fair value of $59,291. The unamortized debt discount
associated with these warrants is $37,507 and is shown as a reduction
of the $125,000 note outstanding at December 31, 2000.
In 2000, the Company also received a $5,000 loan from an
individual which is outstanding at December 31, 2000. The note is
non-interest bearing.
LONG TERM DEBT
In October and November 1998, the Company placed $450,000 of 7%
notes. Each note holder is entitled to royalties of fifty cents per
$100,000 invested (pro rated for lesser investments) for each T 6000
set top box sold during a period of up to five years. Of the total
notes placed, $300,000 were converted into common stock upon the
closing of a private offering in the first half of 2000 (note 9) and
the remainder are due in October 2001. At December 31, 2000 and 1999,
there was $150,000 and $450,000 outstanding of these royalty notes,
respectively.
In January, February and March 1999, the Company sold $600,000 in
a private placement offering to outside investors. Investors in the
private placement received 9% convertible debentures with a principal
amount equal to the amount of the investment and a term of two years.
The debentures are convertible into the Company's common stock at a
price equal to the lesser of (i ) 75% of the average closing bid price
of the common stock for the five days immediately preceding the date of
conversion, or (ii) four times the five-day average closing bid price
for the five days immediately preceding the date of closing. The
Company may redeem the debentures at prices that range from 115% to
125% of the principal amount, plus accrued interest. The debentures are
subject to mandatory conversion upon maturity. The Company is currently
F-18
in default as it relates to the amounts due in 2001. At December 31,
2000, $290,000 of the debentures had converted to shares of common
stock and $10,000 had been redeemed. At December 31, 2000 and 1999,
there was $300,000 and $430,000 outstanding of these 9% debentures,
respectively.
In November and December 1999, the Company sold $314,980 in a
private placement offering to outside investors. Investors in the
private placement received 4% convertible debentures with a principal
amount of $110,000 and 8% convertible debentures with a principal
amount of $204,980, both with a term of three years. The debentures are
convertible into the Company's common stock at a price equal, at the
Debenture holders option, either, (i ) 65% of the average closing bid
price of the common stock for the five days immediately preceding the
date of conversion, or (ii) $0.75 cents per share for the 4% debentures
or $0.50 per share for the 8% debentures. The Company filed a
Registration Statement that became effective within 90 days of the
Closing Date The Company has the right to redeem in part or in full any
outstanding debentures at 135% of the principal amount, plus accrued
interest. The debentures are subject to mandatory conversion upon
maturity. At December 31, 2000, $265,381 of the debentures had
converted to shares of common stock. At December 31, 2000 and 1999,
there was $49,599 and $204,980 outstanding of these debentures,
respectively.
The Company issued $629,980 aggregate principal amount of 8%
convertible debentures in the first quarter of 2000. The Debentures
have a term of three years and are convertible into the Company's
common stock at a price, at the option of the holder, equal to either
(I) 75% of the average closing bid price of the common stock for the
five trading days immediately preceding conversion, or (ii) $1.50 per
share. Celerity may redeem the debentures at a redemption price of 125%
of the principal amount, plus accrued interest. All outstanding
principal and interest is subject to mandatory conversion three years
after issuance. At December 31, 2000, $449,900 of the debentures had
converted to shares of common stock and $180,080 remained outstanding.
EQUITY LINE OF CREDIT
Effective September 30, 1999, the Company entered into $5,000,000
Line of Credit Agreement. Pursuant to the Line of Credit Agreement the
Company could issue and sell up to $5,000,000 principal amount of 4%
Convertible Debentures during a period beginning on the effective date
of a registration statement covering the common stock underlying the
Convertible Debentures and ending September 30, 2000. The amount of the
drawdown is subject to the satisfaction of certain conditions,
including conditions relating to the trading volume of the Company's
common stock and is limited to a maximum of $500,000 per calendar
month. During the period ended September 30, 2000, the Company had
issued $550,000 of these debentures. On October 16, 2000 the agreement
was renewed for a term ending October 31, 2001 and the maximum amount
of debentures which may be issued was increased to a cumulative
$10,000,000. Between the renewal date and December 31, 2000, the
Company has issued $455,000 of additional debentures.
The Company issued $1,005,000 aggregate principal amount of 4%
convertible debentures in the second and fourth quarters of 2000 under
this agreement. The debentures have a term of four years and are
convertible into the Company's common stock at a price, at the option
of the holder, equal to 75% of the average closing bid price of the
common stock for the five trading days immediately preceding
conversion. At December 31, 2000, $705,000 of the debentures had
converted to shares of common stock and $300,000 remain outstanding.
BENEFICIAL CONVERSION FEATURES OF DEBT
The Company recognized a beneficial conversion feature for the
various convertible debentures issued in 2000 and 1999 as discount on
the convertible debentures and as additional paid-in capital. This
discount of $651,104 and $375,935 for 2000 and 1999 respectively, has
been amortized as a non-cash interest expense over the period between
the date of issuance of the convertible debentures and the date they
first become convertible.
F-19
CAPITAL LEASE OBLIGATIONS
In April 1998, the Company incurred capital lease obligations of
approximately $259,000 for certain equipment. Monthly payments of
principal and interest of $9,541 were due through 2001 with $82,628
past due at December 31, 1999. The equipment was returned to the lessor
as part of the relocation of the Company's facilities (Note 6). The
Company agreed to a final settlement totaling $240,000 with the lessor
in June 2000. At December 31, 2000 and 1999, $150,000 and $201,173 was
outstanding, respectively.
The maturities of the Company's long-term debt as of December 31,
2000, are as follows:
2001 $ 570,000
2002 79,599
2003 180,080
2004 300,000
-----------
1,129,679
Less debt discount (29,254)
Less current portion (570,000)
-----------
Total long-term debt and capital lease
obligations $ 530,425
===========
11. SERIES A REDEEMABLE CONVERTIBLE PREFERRED STOCK
In August 2000, the Company consummated a private placement of 41
shares of Series A redeemable convertible preferred stock, resulting in
net proceeds of approximately $369,000. In addition warrants with a
fair value of $200,000 were issued to the placement agent and were
recorded as a cost of the offering.
The preferred stock is convertible into shares of common stock at
a conversion price equal to the lesser of (i) $1.40 per share or (ii)
75% of the average closing bid price of the common stock for the five
trading days immediately preceding the date of conversion. The
preferred stock became convertible no earlier than 90 days from its
issuance or the date of effectiveness of a registration statement
registering the common stock into which the preferred stock is
convertible. All shares of preferred stock outstanding on August 31,
2002 convert into shares of common stock as if holders of such shares
had delivered a conversion notice effective at such date. At December
31, 2000, $272,850 face value of the preferred stock had converted to
shares of common stock.
The holders of two-thirds of the Preferred Stock can require the
Company to redeem their shares upon the occurrence of any of the
following events: (a) a merger where the Company is not the surviving
entity, (b) a sale of all or substantially of the the Company's assets,
(c) failure to maintain an effective registration statement, or (d)
failure to comply with certain other covenants . The amount payable
upon such redemption ranges from liquidation value to a premium of up
to 120%. The Company, at its option, can redeem the Preferred Stock
upon payment of 125% of the liquidation value. In 2000, the Company
accreted the carrying value of its Preferred Stock to 120% of
liquidation value by increasing the accumulated deficit by $298,966.
Each share of Preferred Stock has a liquidation preference of
$10,000 plus an amount representing 6% per annum accrued since
issuance. The Preferred Stock does not pay a dividend.
On the date of issuance of the Preferred Stock, the effective
conversion price was at a discount to the price of the common stock
into which the Preferred Stock is convertible. The beneficial
conversion feature was reflected as a dividend over the 90 day period
until the stock was convertible. The Company recorded a $33,942
dividend relative to the beneficial conversion feature.
F-20
12. STOCK OPTIONS
The Company established a stock option plan in 1995 to provide
additional incentives to its officers and employees. Eligible persons
are all employees employed on the date of grant. Management may vary
the terms, provisions and exercise price of individual options granted,
with both incentive stock options and non-qualified options authorized
for grant. In 1995, the Board of Directors approved the issuance of up
to 178,929 options to acquire common shares of which 37,500 and 24,500
were outstanding at December 31, 2000 and 1999, respectively. In 1997,
the Company established an additional stock option plan under which
200,000 options to acquire common shares were reserved for issuance.
There were options to purchase 159,483 and 207,920 shares outstanding
under the 1997 plan at December 31, 2000 and 1999, respectively.
Options granted under these plans subsequent to the 1997 initial
public offering generally vest over three years and expire ten years
from the date of grant.
The Company has also granted options to members of the Company's
Board and to members of management which are outside the 1995 and 1997
plans. There were 499,200 and 483,200 of these options which remain
outstanding at December 31, 2000 and 1999, respectively. These options
generally vest over 3 years and expire ten years from date of grant.
2000 1999
--------------------------- ---------------------------
Options Weighted-Average Options Weighted-Average
Exercise Price Exercise Price
Outstanding at beginning of year 715,620 $ 0.89 742,120 $ 0.78
Granted 143,763 0.76 30,000 0.66
Exercised (87,500) 0.59 (28,800) 0.10
Forfeited (75,700) 0.69 (27,700) 0.74
-------- -------- -------- --------
Outstanding at end of year 696,183 $ 0.93 715,620 $ 0.89
======== ======== ======== ========
Options exercisable at year end 507,407 $ 0.90 574,458 $ 0.78
The weighted-average fair value per option granted during the
year was $0.62 and $0.49 for the years ended December 31, 2000 and
1999, respectively.
The following table summarizes information about stock options at
December 31, 2000:
Options Outstanding Options Exercisable
------------------------------------ ---------------------------------------
Weighted-Average
Number Remaining Number
Exercise Prices Outstanding Contractual Life Outstanding
December 31, 2000
$ 0.17 20,000 9.86 --
$ 0.35 40,000 9.80 --
$ 0.66 22,500 8.70 7,425
$ 0.69 413,400 6.42 413,334
$ 0.91 37,500 9.59 --
$ 1.25 46,263 9.59 --
$ 1.38 26,000 6.26 26,000
$ 1.63 6,152 7.50 4,122
$ 1.88 2,666 7.41 1,786
$ 2.13 60,000 7.02 40,200
$ 2.63 20,000 7.01 13,400
$ 2.94 1,702 7.35 1,140
The Company recorded no compensation expense related to options
granted in 2000 and 1999, as the exercise price of the options was
equal to the fair market value of the Company's common stock at grant
dates. Had compensation cost for the options granted been determined
based on the fair value at the grant dates for awards under the Plan
consistent with the method of SFAS 123, the Company's net loss would
have been adjusted to the pro forma amounts indicated below at December
31:
2000 1999
As As
Reported Pro Forma Reported Pro Forma
Net loss $ (5,287,499) $ (5,377,256) $ (5,408,156) $ (5,560,882)
Net loss per share $ (0.49) $ (0.50) $ (1.06) $ (1.09)
The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option-pricing model with the following
assumptions used for grants in 2000 and 1999; risk-free interest rate
of 6.77% in 2000 and 6.36% in 1999, volatility between 26% and 449% in
1999 and 168% and 200% in 2000 and expected lives from five to ten
years.
13. LOSS PER SHARE
Basic and diluted loss per share were computed by dividing net
loss applicable to common stock by the weighted average common shares
outstanding during each period. Potential common equivalent shares of
17,079,077 and 1,079,457 at December 31, 2000 and 1999, respectively,
are not included in the computation of per share amounts in the periods
because the Company reported a loss from continuing operations.
Following is a reconciliation of the numerators and denominators
of the basic and diluted earnings per share:
2000 1999
Loss
Basic and diluted:
Loss available to common stockholders $ (5,620,407) $ (5,408,156)
Shares
Basic and diluted:
Weighted-average common shares outstanding 11,465,200 5,108,954
14. CASH FLOWS
Supplemental disclosure of cash flow information for the years
ended December 31, 2000 and 1999, is as follows:
2000 1999
Cash paid during the year for:
Interest $ 849 $ 252,630
F-21
Noncash investing and financing activities:
2000
The Company issued 1,197,841 shares of common stock with a value
of $1,167,642 as payment for certain consulting and directors' fees,
payroll and accounts payable items.
Employees exercised common stock options for 73,500 shares of
common stock through forgiveness of $50,531 of wages payable.
The Company converted $1,783,412 of notes, accounts, wages and
related payroll taxes into 1,503,738 shares of common stock and
warrants to purchase 357,464 shares of common stock.
The Company converted $1,606,608 of the convertible debentures
into 9,009,096 shares of common stock.
The Company converted $276,808 of Series A Preferred Stock into
4,695,453 shares of common stock.
1999
The Company converted $380,172 in accounts payable into common
stock at face value.
In 1999, $160,000 of the convertible debentures were converted
into common stock.
15. COMMITMENTS AND CONTINGENCIES
The Company is a defendant in a lawsuit brought by a financial
printer for non-payment of expenses. The action was brought on January
30, 2001 and is pending before Supreme Court of the State of New York,
County of New York. In this action, the plaintiff, Merrill/New York
Company, has sued the Company for the non-payment of financial printing
fees and is seeking approximately $118,000 in damages, plus interest
and certain costs. The Company intends to defend the action vigorously.
In addition, certain creditors have threatened litigation if not
paid. Celerity is seeking to make arrangements with these creditors.
There can be no assurance that any claims, if made, will not have an
adverse effect on Celerity.
The Company leases office space under an operating lease. Future
minimum lease payments by year, and in the aggregate, under this
noncancelable operating lease at December 31, 2000, are as follows:
2001 60,000
2002 60,000
2003 2,500
---------
$ 122,500
=========
Rent expense for operating leases was $56,354 and $371,367 in
2000 and 1999, respectively.
The Company entered into a written lease agreement dated November
25, 1997, which was amended on April 1, 1998. The lease was terminated
by the landlord as a result of the Company's breach, effective January
29, 1999. Pursuant to an agreement between the Company and the
landlord, the Company acknowledged breach of the lease due to its
failure to pay the required rental amount, and the landlord agreed to
forego its right to immediate possession of the premises until February
20, 1999 if the Company performed certain acts. In June 2000, the
Company reached a settlement with the Landlord and, upon payment of
$175,000, has been fully released from all liability under the lease.
F-22
At March 20, 2001 the Company had issued 49,812,845 shares of
common stock with $426,247 aggregate principal and interest amount of
convertible debentures and Series A Preferred Stock outstanding. The
Company would be obligated to issue an aggregate of 3,275,296 shares of
common stock if all holders of the outstanding Convertible Securities
were to issue conversion notices, based upon the five day average
closing price of $.1735 as of March 20, 2001, discounted to 75% of
market price, or $.1301. Accordingly, sufficient shares of common stock
are not available for issuance upon conversion of the convertible
securities or upon exercise of outstanding options and warrants. While
the Company intends to schedule a stockholders meeting as soon as
possible to obtain approval for an increase in the number of authorized
shares of common stock, it cannot currently satisfy its obligations in
respect to the issuance of additional shares of common stock. To the
extent the Company is unable to issue shares as required, it will be in
breach of its obligations under the terms of the outstanding
convertible securities agreements, and will incur liability for
liquidated damages of approximately $6,000 per month.
16. SUBSEQUENT EVENTS
In the first quarter of 2001, the Company consummated a private
placement of 23 shares of Series B Redeemable Convertible Preferred
Stock resulting in net proceeds of approximately $230,000. The Stock
provides for preferential dividends at an annual rate of 8%. The
preferred stock is convertible into shares of common stock at a
conversion price equal $0.025 per share, subject to availability, at
any time during the two years following execution of the subscription
agreements. Should there be an insufficient number of shares of common
stock available at the time the preferred stock is offered for
conversion, the conversion period shall be extended by the number of
days between the closing date and the date common shares become
available. Two years from the original issuance date, the Company shall
offer to redeem such preferred shares then outstanding at a price equal
to the original issuance price plus accrued dividends. The beneficial
conversion feature of $98,000 will be reflected as a dividend over the
two year period until the stated redemption date. Warrants to purchase
one share of common stock for each two shares of common stock issued
upon conversion of this tranche of Series B Preferred Stock were
included. These warrants are exercisable for a two year period
following the first date that the last share of the Series B Redeemable
Convertible Preferred Stock is converted into common stock and have an
exercise price of $0.10 per share. The company allocated $132,000 of
the proceeds to the warrants based on their relative fair value.
Also in the first quarter of 2001, the Company issued $1,790,000
principal amount of 4% convertible debentures under its Equity Line of
Credit Agreement resulting in net proceeds of approximately $1,633,000.
The Company recognized a beneficial conversion feature for the
convertible debentures as a discount on the convertible debentures and
as additional paid-in capital. This discount of $717,985 will be
amortized as a non-cash interest expense over the five year period from
the date of issuance to the stated redemption date of the debentures.
The Company also consummated an additional private placement of
51.2 shares of Series B Redeemable Convertible Preferred Stock
resulting in gross proceeds of approximately $512,000. The beneficial
conversion feature of $512,000 will be reflected as a dividend over the
two-year period until the stated redemption date. The stock provides
for preferential dividends at an annual rate of 8%. The preferred stock
is convertible into shares of common stock at a conversion price equal
$0.025 per share, subject to availability, at any time during the two
years following execution of the subscription agreements. Should there
be an insufficient number of shares of common stock available at the
time the preferred stock is offered for conversion, the conversion
period shall be extended by the number of days between the closing date
and the date common shares become available. Two years from the
original issuance date the Company shall offer to redeem such preferred
shares then outstanding at a price equal to the original issuance price
plus accrued dividends.
The Company also received $30,000 from the issuance of 1,000,000
shares of its common stock.
F-23
WE HAVE NOT AUTHORIZED ANY DEALER,
SALESPERSON OR OTHER PERSON TO PROVIDE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS
ABOUT CELERITY SYSTEMS, INC. EXCEPT THE
INFORMATION OR REPRESENTATIONS CONTAINED
IN THIS PROSPECTUS. YOU SHOULD NOT RELY ON
ANY ADDITIONAL INFORMATION OR
REPRESENTATIONS IF MADE.
-----------------------
This prospectus does not constitute an ----------------------
offer to sell, or a solicitation of an
offer to buy any securities: PROSPECTUS
O except the common stock offered by ---------------------
this prospectus;
O in any jurisdiction in which the
offer or solicitation is not
authorized; 228,440,611 SHARES OF COMMON STOCK
O in any jurisdiction where the dealer
or other salesperson is not
qualified to make the offer or CELERITY SYSTEMS, INC.
solicitation;
O to any person to whom it is unlawful
to make the offer or solicitation;
or
___________ __, 2001
O to any person who is not a United
States resident or who is outside
the jurisdiction of the United
States.
The delivery of this prospectus or any
accompanying sale does not imply that:
O there have been no changes in the
affairs of Celerity Systems, Inc.
after the date of this prospectus;
or
O the information contained in this
prospectus is correct after the date
of this prospectus.
-----------------------
Until __________, 2001, all dealers
effecting transactions in the registered
securities, whether or not participating
in this distribution, may be required to
deliver a prospectus. This is in addition
to the obligation of dealers to deliver a
prospectus when acting as underwriters.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
-----------------------------------------
INDEMNIFICATION
Our Certificate of Incorporation provides that we will indemnify its
officers, directors, employees and agents to the fullest extent permitted by
Delaware law. Any indemnitee is entitled to such indemnification in advance of
any final proceeding. Insofar as indemnification for liabilities arising under
the Securities Act of 1933 (the "Act") may be permitted to our directors,
officers and controlling persons pursuant to the foregoing provisions, or
otherwise, we have been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
-------------------------------------------
The following table sets forth estimated expenses expected to be
incurred in connection with the issuance and distribution of the securities
being registered.
Securities and Exchange Commission Registration Fee $ 2,500
Printing and Engraving Expenses $ 10,000
Accounting Fees and Expenses $ 15,000
Legal Fees and Expenses $ 25,000
Blue Sky Qualification Fees and Expenses $ 2,500
Miscellaneous $ 5,000
--------------
TOTAL $ 60,000
==============
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
---------------------------------------
In October 2001, we issued $665,000 of convertible debentures, from
which we received net proceeds of approximately $400,000. These debentures
accrued interest at 4% per year and are convertible into shares of common stock
at a conversion price equal to 75% of the average closing bid price of
Celerity's common stock for the 5 days prior to conversion. At Celerity's
option, these debentures may be paid in cash or converted into shares of common
stock on the fifth anniversary unless converted earlier by the holder. Celerity
paid consulting fees of $278,565 to Yorkville Advisors Management, LLC in
connection with this offering. Also in October, we sold 6 shares of Series C
Preferred Stock for $60,000 in cash. Each share of Series C Preferred Stock is
convertible into 250,000 shares of common stock at the holder's discretion.
In September 2001, Celerity issued warrants to Internet Finance to
purchase 500,000 shares of Celerity common stock. One-half of these warrants
have an exercise price of $0.15 per share and one-half have an exercise price of
$0.25 per share. In addition, Celerity is obligated to issue to Internet Finance
warrants to purchase additional shares of common stock if Celerity is successful
in obtaining financing arranged by Internet Finance. For each $500,000 of
capital received by Celerity, Internet Capital will receive warrants to purchase
250,000 shares of common stock at $0.15 per share. Internet Finance will also
receive cash compensation of 2.5% of all funds received by Celerity under the
contract.
In August 2001, we issued $1,586,000 of convertible debentures, from
which we received net proceeds of approximately $889,000. Celerity paid
consulting fees of $680,000 to Yorkville Advisors Management, LLC in connection
with this offering. Celerity issued a warrant to Yorkville Advisors to purchase
2,500,000 shares of common stock at $0.10 per share. These debentures accrued
interest at 4% per year and are convertible into shares of common stock at a
conversion price equal to 75% of the average closing bid price of Celerity's
common stock for the 5 days prior to conversion. At Celerity's option, these
debentures may be paid in cash or converted into shares of common stock on the
fifth anniversary unless converted earlier by the holder. Also in October, we
sold 6 shares of Series C Preferred Stock for $60,000 in cash. Each share of
Series C Preferred Stock is convertible into 250,000 shares of common stock at
the holder's discretion.
II-1
In July 2001, we issued 2,400,000 shares of common stock to Artesian
Direct for its commitment to purchase $10 million of Celerity's products or to
provide $10 million of financing. These shares were valued at $0.17 per share on
the date of issuance or $408,000. This amount will be amortized as a cost of the
related sale or financing. Ed Kidston, a member of our Board of Directors, owns
30% of the outstanding capital stock of Artesian Direct.
In June 2001, we entered into an Equity Line of Credit pursuant to
which Cornell Capital Partners has agreed to purchase up to $10.0 million of
common stock. We have registered up to 164,314,919 shares in this registration
statement for issuance to the investor under the Equity Line of Credit and
convertible debentures. In connection with the Equity Line of Credit, Celerity
issued a warrant to Yorkville Advisors, the general partner of Cornell Capital
Partners, to purchase 3,500,000 shares of common stock at $0.10 per share.
In March and April 2001, Celerity sold 74.5333 shares of Series B
Redeemable Convertible Preferred Stock, from which we received gross proceeds of
$745,333. In addition, we issued 5 shares of Series B Redeemable Convertible
Preferred Stock as payment for certain accounts payable and accrued wages to
Kenneth D. Van Meter, our President, Chief Executive Officer and Chairman of the
Board of Directors. We also sold 1,000,000 shares of common stock for $30,000 in
gross proceeds.
In March 2001, we issued $1,650,000 of convertible debentures pursuant
to an Equity Line of Credit, from which we received net proceeds of
approximately $1,438,856. These debentures accrued interest at 4% per year and
are convertible into shares of common stock at a conversion price equal to 75%
of the average closing bid price of Celerity's common stock for the 5 days prior
to conversion. At Celerity's option, these debentures may be paid in cash or
converted into shares of common stock on the fifth anniversary unless converted
earlier by the holder.
In January 2001, we issued $150,000 of convertible debentures pursuant
to an Equity Line of Credit, from which we received net proceeds of
approximately $135,000. These debentures accrued interest at 4% per year and are
convertible into shares of common stock at a conversion price equal to 75% of
the average closing bid price of Celerity's common stock for the 5 days prior to
conversion. At Celerity's option, these debentures may be paid in cash or
converted into shares of common stock on the fifth anniversary unless converted
earlier by the holder.
During November 2000, GMF Holdings purchased convertible debentures for
an aggregate purchase price of $405,000.
On August 31, 2000, we sold 41 shares of Series A preferred stock to
accredited investors for $410,000. May Davis, the broker-dealer, received
$41,000 and five-year warrants to purchase 360,000 shares of common stock at
$0.70 per share as a placement fee.
On June 16, 2000, we sold 1.5 million shares of our common stock to an
accredited investor for $1,020,000 in cash and the execution of a consulting
contracting with its affiliate.
In April 2000, we borrowed $500,000 from a private investor. In May
2000, such investor exchanged all rights under the note for our common stock and
warrants to purchase common stock. M Holdings, Inc. received warrants to
purchase 100,000 shares of our common stock in connection with these
transactions.
During April and May 2000, we issued an aggregate of 1,503,738 shares
of our common stock and warrants to purchase an aggregate of 357,462 shares of
common stock to certain of our creditors, including current and former officers
and employees, in exchange for the cancellation of an aggregate amount of
approximately $1.79 million of indebtedness, including accrued interest. Of such
indebtedness, approximately $665,000 was held by our officers and directors and
approximately $377,000 was held by other current and former employees.
In December 1999 and January 2000, we issued 400,000 shares of our
common stock to David Hultquist, a nominee for our Board of Directors, at the
then-current market price of the common stock, for a total of $80,000.
From December 1999 through March 2000, we issued $629,980, aggregate
principal amount of 8% subordinated convertible debentures due 2003, to eight
private investors. Such debentures are convertible at any time at the option of
the holder at a conversion price roughly equal to 75% of the market price of the
common stock. May Davis, the broker-dealer, received $62,998 as a placement fee.
II-2
During November 1999, we issued 8% subordinated convertible debentures
for an aggregate price of $204,980 due 2002 to five private investors. Such
debentures are convertible at any time at the option of the holder at a
conversion price of 75% of the market price of the common stock. May Davis, the
broker-dealer, received $20,498 as a placement fee.
During October and November 1999, we issued 4% subordinated convertible
debentures for an aggregate price of $110,000 due 2002 to seven private
investors. Such debentures are convertible at any time at the option of the
holder at a conversion price of 75% of the market price of the common stock. May
Davis, the broker-dealer, received $11,000 as a placement fee.
On September 30, 1999, we executed a Line of Credit Agreement with an
accredited investor, which permitted us to issue up to $5 million in 4%
convertible debentures to such investor over the life of the agreement. Since
such time, we have issued $550,000 of such debentures. Such debentures are
convertible at any time at the option of the holder at a conversion price of 75%
of the market price of the common stock. May Davis, the broker-dealer, received
$35,000 and three-year warrants to purchase 250,000 shares of common stock at
$0.586 per share as a placement fee.
In January, February and March 1999, we issued 9% convertible
debentures for an aggregate price of $600,000 due 2001 to four accredited
investors. Such debentures are convertible at any time at the option of the
holder at a conversion price of 75% of the market price of our common stock or
four times the five-day average closing bid price for the five days immediately
preceding the date of closing for such investor. We have issued 1,207,854 shares
of our common stock pursuant to conversion notices relating to $300,000,
aggregate principal amount, of these debentures. May Davis, the broker-dealer,
was paid a 10% cash fee and a 2% fee for non-accountable expenses and repayment
of certain other expenses. May Davis, the broker-dealer, received $72,000 and
three-year warrants to purchase 100,000 shares of common stock at $1.00 per
share as a placement fee.
In October 1998, we issued 7% Notes due 2001 for an aggregate price of
$450,000 to private investors, including our officers, directors and employees.
Noteholders are also entitled to a royalty based on the number of set top boxes
that we sell through 2003.
With respect to the sale of unregistered securities referenced above,
all transactions were exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933 (the "1933 ACT"), and Regulation D promulgated under the
1933 Act. In each instance, the purchaser had access to sufficient information
regarding us so as to make an informed investment decision. More specifically,
each purchaser signed a written subscription agreement with respect to their
financial status and investment sophistication in which they represented and
warranted, among other things, that they had:
o the ability to bear the economic risks of an investment in the
shares of our common stock;
o a certain net worth sufficient to meet our suitability standards;
and
o been provided with all material information requested by the
purchaser or his or her representatives, and been provided an
opportunity to ask questions of and receive answers from us
concerning our business and the terms of the offering.
II-3
ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
------------------------------------------
(a) The following exhibits are filed as part of this registration
statement:
EXHIBIT NO. DESCRIPTION LOCATION
-------------------- ------------------------------------------------- ------------------------------------------------
3.1 Certificate of Incorporation of Celerity Systems, Incorporated by reference to Exhibit 3.1 to the
Inc. Registration Statement on SB-2 filed with the
SEC on August 13, 1997
3.2 Bylaws of Celerity Systems, Inc. Incorporated by reference to Exhibit 3.2 to the
Registration Statement on SB-2 filed with the
SEC on August 13, 1997
3.3 Certificate of Designation of Series C Preferred Provided herewith
Stock
4.1 Form of Underwriter's Warrant Incorporated by reference to Exhibit 4.1 to
Amendment No. 1 to Registration Statement on
SB-2 filed with the SEC on October 8, 1997
4.2 1995 Stock Option Plan Incorporated by reference to Exhibit 4.2 to the
Registration Statement on SB-2 filed with the
SEC on August 13, 1997
4.3 1997 Stock Option Plan Incorporated by reference to Exhibit 4.3 to the
Registration Statement on SB-2 filed with the
SEC on August 13, 1997
4.4 Form of Stock Certificate Incorporated by reference to Exhibit 4.4 to
Amendment No. 2 to Registration Statement on
SB-2 filed with the SEC on October 28, 1997
4.5 Form of Bridge Warrant Incorporated by reference to Exhibit 4.5 to the
Registration Statement on SB-2 filed with the
SEC on August 13, 1997
4.6 Form of 1996 Warrant Incorporated by reference to Exhibit 4.6 to
Amendment No. 2 to Registration Statement on
SB-2 filed with the SEC on October 28, 1997
4.7 Form of Hampshire Warrant Incorporated by reference to Exhibit 4.7 to
Amendment No. 1 to Registration Statement on
SB-2 filed with the SEC on October 8, 1997
4.8 Form of 1995 Warrant Incorporated by reference to Exhibit 4.8 to the
Registration Statement on SB-2 filed with the
SEC on August 13, 1997
4.9 Letter Agreement dated July 15, 1997, between Incorporated by reference to Exhibit 4.9 to the
Celerity and Mahmoud Youssefi, including exhibits Registration Statement on SB-2 filed with the
SEC on August 13, 1997
4.10 Letter Agreement, dated July 11, 1997, between Incorporated by reference to Exhibit 4.10 to the
Celerity and Dr. Fenton Scruggs Registration Statement on SB-2 filed with the
SEC on August 13, 1997
4.11 Form of 9% Convertible Debenture Incorporated by reference to Exhibit 4.11 to
Amendment No. 1 to Form 10-KSB for the year
ended December 31, 1998 filed with the SEC on
April 30, 1999
II-4
EXHIBIT NO. DESCRIPTION LOCATION
-------------------- ------------------------------------------------- ------------------------------------------------
4.12 Form of 7% Promissory Note Incorporated by reference to Exhibit 4.12 to
Amendment No. 1 to Form 10-KSB for the year
ended December 31, 1998 filed with the SEC on
April 30, 1999
4.13 Form of Registration Rights Agreement, between Incorporated by reference to Exhibit 4.13 to
Celerity and each of RNI Limited Partnership, Amendment No. 1 to Form 10-KSB for the year
First Empire Corporation, Greg A. Tucker and ended December 31, 1998 as filed with the SEC on
Michael Kesselbrenner April 30, 1999
4.14 Form of Warrant issued April 27, 1999 Incorporated by reference to Exhibit 4.2 to the
Registration Statement on S-3 filed with the SEC
on June 18, 1999
4.15 Shareholders Agreement, dated August 10, 1999, Incorporated by reference to Exhibit 99.2 to the
between Celerity Systems, Inc., FutureTrak Merger Form 8-K filed with the SEC on September 14, 1999
Corp. and certain parties listed therein
4.16 Registration Rights Agreement, dated September 30, Incorporated by reference to Exhibit 99.2 to the
1999, between Celerity and GMF Holdings Form 8-K filed with the SEC on October 8, 1999
4.17 Form of Debenture in connection with Line of Incorporated by reference to Exhibit 99.4 to
Credit Agreement, dated September 30, 1999 the Form 8-K filed with the SEC on October 8, 1999
4.18 Form of Warrant issued September 30, 1999 Incorporated by reference to Exhibit 4.10 to the
Registration Statement on S-3 filed with the SEC
on February 15, 2000
4.19 Form of 4% Convertible Debenture due 2002 between Incorporated by reference to Exhibit 4.2 to the
Celerity and each of John Bridges, John Faure, Registration Statement on S-3 filed with the SEC
Loni Spurkeland, Robert Dettle, Michael Genta, on February 15, 2000
Lennart Dallgren
4.20 Form of 8% Convertible Debenture due 2002 between Incorporated by reference to Exhibit 4.3 to the
Celerity and each of Richard T. Garrett, W. David Registration Statement on S-3 filed with the SEC
McCoy, Dominick Chirarisi, Gilda R. Chirarisi, on February 15, 2000
Joseph C. Cardella, Carl Hoehner
4.21 Form of 8% Convertible Debenture due 2003 between Incorporated by reference to Exhibit 4.4 to the
Celerity and John Bolliger Registration Statement on S-3 filed with the SEC
on February 15, 2000
4.22 Form of Registration Rights Agreement, between Incorporated by reference to Exhibit 4.6 to the
Celerity and each of John Bridges, John Faure, Registration Statement on S-3 filed with the SEC
Loni Spurkeland, Robert Dettle, Michael Genta, on February 15, 2000
Lennart Dallgren
4.23 Form of Registration Rights Agreement, between Incorporated by reference to Exhibit 4.7 to the
Celerity and each of Richard T. Garrett, W. David Registration Statement on S-3 filed with the SEC
McCoy, Dominick Chirarisi, Gilda R. Chirarisi, on February 15, 2000
Joseph C. Cardella, Carl Hoehner
4.24 Form of Registration Rights Agreement, between Incorporated by reference to Exhibit 4.8 to the
Celerity and John Bolliger Registration Statement on S-3 filed with the SEC
on February 15, 2000
4.25 Form of 8% Convertible Debenture due 2003 between Incorporated by reference to Exhibit 99.7 to the
Celerity and each of Sui Wa Chau, Qinu Guan, Form 8-K filed with the SEC on March 23, 2000
Peter Chenan Chen, K&M Industry, Inc., Michael
Dahlquist, Denise and Vernon Koto and Rance Merkel
II-5
EXHIBIT NO. DESCRIPTION LOCATION
-------------------- ------------------------------------------------- ------------------------------------------------
4.26 Form of Registration Rights Agreement, between Incorporated by reference to Exhibit 99.8 to the
Celerity and each of Sui Wa Chau, Qinu Guan, Form 8-K filed with the SEC on March 23, 2000
Peter Chenan Chen, K&M Industry, Inc., Michael
Dahlquist, Denise and Vernon Koto and Rance Merkel
4.27 Securities Purchase Agreement, dated August 31, Incorporated by reference to Exhibit 99.1 to the
2000, between Celerity and the Investors Form 8-K filed with the SEC on September 5, 2000
specified therein
4.28 Registration Rights Agreement, dated August 31, Incorporated by reference to Exhibit 99.2 to the
2000, between Celerity and the Investors Form 8-K filed with the SEC on September 5, 2000
specified therein
4.29 Form of Warrant issued March 31, 2000 Incorporated by reference to Exhibit 99.3 to the
Form 8-K filed with the SEC on April 5, 2000
5.1 Opinion re: legality Provided herewith
10.1 Employment Agreement, dated January 7, 1997, as Incorporated by reference to Exhibit 10.1 to
amended, between Celerity and Kenneth D. Van Meter Amendment No. 1 to Registration Statement on
SB-2 filed with the SEC on October 8, 1997
10.2 Employment, Non-Solicitation, Confidentiality and Incorporated by reference to Exhibit 10.2 to the
Non-Competition Agreement, dated as of May 1, Registration Statement on SB-2 filed with the
1996, between Celerity and Glenn West SEC on August 13, 1997
10.3 Termination Agreement, dated as of April 5, 1997, Incorporated by reference to Exhibit 10.3 to the
between Celerity and Mahmoud Youssefi Registration Statement on SB-2 filed with the
SEC on August 13, 1997
10.4 [Reserved]
10.5 Letter Agreement, dated March 13, 1997, between Incorporated by reference to Exhibit 10.5 to
Celerity and William Chambers Amendment No. 1 to Registration Statement on
SB-2 filed with the SEC on October 8, 1997
10.6 Letter Agreement, dated July 24, 1997, between Incorporated by reference to Exhibit 10.6 to
Celerity and Mark. C. Cromwell Amendment No. 1 to Registration Statement on
SB-2 filed with the SEC on October 8, 1997
10.7 Exclusive OEM/Distribution Agreement, dated Incorporated by reference to Exhibit 10.7 to the
March 10, 1995, between Celerity and InterSystem Registration Statement on SB-2 filed with the
Multimedia, Inc. SEC on August 13, 1997
10.8 Purchase Order Agreement, dated June 26, 1995, Incorporated by reference to Exhibit 10.8 to the
between Tadiran Telecommunications Ltd. and Registration Statement on SB-2 filed with the
Celerity SEC on August 13, 1997
10.9 License Agreement, dated as of September 26, Incorporated by reference to Exhibit 10.9 to the
1996, between Celerity and En Kay Telecom Co., Registration Statement on SB-2 filed with the
Ltd. SEC on August 13, 1997
10.10 License Agreement, dated as of February 21, 1997, Incorporated by reference to Exhibit 10.10 to
between Celerity and En Kay Telecom Co., Ltd. the Registration Statement on SB-2 filed with
the SEC on August 13, 1997
10.11 Remarketer Agreement, dated as of June 15, 1997, Incorporated by reference to Exhibit 10.11 to
between Celerity and Minerva Systems, Inc. the Registration Statement on SB-2 filed with
the SEC on August 13, 1997
10.12 Memorandum of Understanding, dated April 25, Incorporated by reference to Exhibit 10.12 to
1996, between Integrated Network Corporation and the Registration Statement on SB-2 filed with
Celerity the SEC on August 13, 1997
II-6
EXHIBIT NO. DESCRIPTION LOCATION
-------------------- ------------------------------------------------- ------------------------------------------------
10.13 Letter of Agreement, dated March 31, 1993, Incorporated by reference to Exhibit 10.13 to
between Celerity and Herzog, Heine & Geduld, Inc. the Registration Statement on SB-2 filed with
and Development Agreement attached thereto the SEC on August 13, 1997
10.14 Subcontract Agreement, dated June 26, 1997, Incorporated by reference to Exhibit 10.14 to
between Unisys Corporation and Celerity the Registration Statement on SB-2 filed with
the SEC on August 13, 1997
10.15 Lease Agreement for Crossroad Commons, dated Incorporated by reference to Exhibit 10.15 to
November 25, 1996, as amended, between Lincoln Amendment No. 1 to Registration Statement on
Investment Management, Inc., as attorney in fact SB-2 filed with the SEC on October 8, 1997
for the Lincoln National Life Insurance Company,
and Celerity
10.16 Lease Agreement, dated November 25, 1997, between Incorporated by reference to Exhibit 10.16 to
Centerpoint Plaza, L.P. and Celerity the Form 10-KSB for the year ended December 31,
1997 filed with the SEC on March 31, 1998
10.17 Letter Agreement, dated October 3, 1997, between Incorporated by reference to Exhibit 10.17 to
Dennis Smith and Celerity the Form 10-KSB for the year ended December 31,
1997 filed with the SEC on March 31, 1998
10.18 Letter Agreement, dated January 8, 1998, between Incorporated by reference to Exhibit 10.18 to
James Fultz and Celerity the Form 10-KSB for the year ended December 31,
1997 filed with the SEC on March 31, 1999
10.19 Amendment to Employment, Non-Solicitation, Incorporated by reference to Exhibit 10.19 to
Confidentiality and Non-Competition Agreement, the Form 10-KSB for the year ended December 31,
dated January 1, 1999, between Celerity and Glenn 1997 filed with the SEC on April 30, 1998
West
10.20 Form of Subscription Agreement, between Celerity Incorporated by reference to Exhibit 10.20 to
and each of RNI Limited Partnership, First Empire Amendment No. 1 to Form 10-KSB for the year
Corporation, Greg A. Tucker and Michael ended December 31, 1998 filed with the SEC on
Kesselbrenner April 30, 1999
10.21 Form of Subscription Agreement, between Celerity Incorporated by reference to Exhibit 10.21 to
and each of Donald Alexander, Leo Abbe, Amendment No. 1 to Form 10-KSB for the year
Centerpoint Plaza, L.P., William Chambers, Fenton ended December 31, 1998 filed with the SEC on
Scruggs, Dennis Smith, Kenneth Van Meter, George April 30, 1999
Semb and Rodney Conard
10.22 Form of Royalty Agreement, between Celerity and Incorporated by reference to Exhibit 10.22 to
each of Donald Alexander, Leo Abbe, Centerpoint Amendment No. 1 to Form 10-KSB for the year
Plaza, LP, William Chambers, Fenton Scruggs, ended December 31, 1998 filed with the SEC on
Dennis Smith, Kenneth Van Meter, George Semb and April 30, 1999
Rodney Conard
10.23 Agreement and Plan of Merger, dated August 10, Incorporated by reference to Exhibit 99.1 to the
1999, between Celerity Systems, Inc., FutureTrak Form 8-K filed with the SEC on September 14, 1999
Merger Corp. and FutureTrak International, Inc.
10.24 Line of Credit Agreement, dated September 30, Incorporated by reference to Exhibit 99.1 to the
1999, between GMF Holdings, May Davis Group and Form 8-K filed with the SEC on October 8, 1999
Celerity
10.25 Termination Agreement, dated December 7, 1999, Incorporated by reference to Exhibit 99.1 to the
between Celerity, FutureTrak Merger Corp. and Form 8-K filed with the SEC on December 8, 1999
FutureTrak International, Inc.
II-7
EXHIBIT NO. DESCRIPTION LOCATION
-------------------- ------------------------------------------------- ------------------------------------------------
10.26 Manufacturing Agreement, dated November 30, 1999, Incorporated by reference to Exhibit 99.2 to the
between Celerity, Primax Electronics, Ltd and Form 8-K filed with the SEC on January 5, 2000
Global Business Group, Ltd.
10.27 Lease, dated December 17, 1999, between Andy Incorporated by reference to Exhibit 99.1 to the
Charles Johnson, Raymond Perry Johnson, Tommy F. Form 8-K filed with the SEC on January 5, 2000
Griffin. and Celerity
10.28 Amendment to the Line of Credit Agreement between Incorporated by reference to Exhibit 10.28 to
Celerity and GMF Holdings, Inc. dated October 16, the Registration Statement on SB-2 filed with
2000 the SEC on October 27, 2000
10.29 Purchase Agreement, dated June 22, 2000, between Incorporated by reference to Exhibit 99.2 to the
Celerity and WIT Technologies Inc. Form 8-K filed with the SEC on July 11, 2000
10.30 Manufacturing Service Agreement, dated January 4, Incorporated by reference to Exhibit 99.1 to the
2001, between Celerity and Nextek, Inc. Registration Statement on SB-2 filed with the
SEC on December 27, 2000
10.31 Broadband Services Agreement, dated January 4, Incorporated by reference to Exhibit 99.2 to the
2001, between Celerity and DeserScape L.P. Form 8-K filed with the SEC on January 10, 2001
10.32 Cooperative Marketing Agreement, dated January 4, Incorporated by reference to Exhibit 99.3 to the
2001, between Celerity and In4Structures LLC Form 8-K filed with the SEC on January 10, 2001
10.33 Equity Line of Credit Agreement dated as of Provided herewith
June 14, 2001 between Celerity Systems, Inc. and
Cornell Capital Partners, L.P.
10.34 Registration Rights Agreement dated as of Provided herewith
June 14, 2001 between Celerity Systems, Inc. and
Cornell Capital Partners, L.P.
10.35 Consulting Services Agreement dated as of Provided herewith
June 14, 2001 between Celerity Systems, Inc. and
Cornell Capital Partners, L.P.
10.36 Escrow Agreement dated as of June 14, 2001 among Provided herewith
Celerity Systems, Inc. Meir Levin and Cornell
Capital Partners, L.P.
10.37 Warrant to purchase 2,500,000 shares of common Provided herewith
stock dated as of June 14, 2001 given by Celerity
Systems to Cornell Capital Partners, L.P.
10.38 Warrant to purchase 3,500,000 shares of common Provided herewith
stock dated as of August, 2001 given by Celerity
Systems to Cornell Capital Partners, L.P.
10.39 Letter Agreement dated August, 2001 between Provided herewith
Celerity Systems and Yorkville Advisors
Management, LLC
10.40 Consulting Services Agreement dated as of August, Provided herewith
2001 between Celerity Systems, Inc. and Yorkville
Advisors, LLC.
10.41 Letter Agreement dated as of September, 2001 Provided herewith
between Celerity Systems, Inc. and Yorkville
Advisors, LLC.
10.42 Consulting Services Agreement dated as of Provided herewith
September, 2001 between Celerity Systems, Inc.
and Yorkville Advisors, LLC.
II-8
EXHIBIT NO. DESCRIPTION LOCATION
-------------------- ------------------------------------------------- ------------------------------------------------
10.43 Advisory Agreement dated September 6, 2001 Provided herewith
between Celerity Systems, Inc. and Internet
Finance International Corporation
10.44 Financing Agreement dated as of August, 2001 Provided herewith
between Celerity Systems, Inc. and Artesian
Direct Holdings Corporation
10.45 Partial Guaranty Agreement dated August, 2001 Provided herewith
given by Ed Kidston to Celerity Systems, Inc.
23.1 Consent of PricewaterhouseCoopers LLP Provided herewith
23.2 Consent of Kirkpatrick & Lockhart LLP Provided herewith
24.1 Power of Attorney Incorporated by reference to the signature page
contained in this Registration Statement on Form
SB-2
II-9
ITEM 28. UNDERTAKINGS.
------------
The undersigned registrant hereby undertakes:
(1) To file, during any period in which it offers or sells
securities, a post-effective amendment to this registration statement to:
(i) Include any prospectus required by Sections
10(a)(3) of the Securities Act;
(ii) To reflect in the prospectus any facts or
events arising after the effective date of the Registration Statement (or the
most recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in the
Registration Statement. Notwithstanding the foregoing, any increase or decrease
in volume of securities offered (if the total dollar value of securities offered
would not exceed that which was registered) and any deviation from the low or
high end of the estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no more than 20 percent
change in the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement;
(iii) To include any material information with
respect to the plan of distribution not previously disclosed in the Registration
Statement or any material change to such information in the Registration
Statement;
(2) That, for the purpose of determining any liability under
the Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be a bona
fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(4) Insofar as indemnification for liabilities arising under
the Securities Act of 1933 (the "Act") may be permitted to directors, officers
and controlling persons of the small business issuer pursuant to the foregoing
provisions, or otherwise, the small business issuer has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the small business issuer of expenses incurred or paid by a
director, officer or controlling person of the small business issuer in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the small business issuer will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
(5) For purposes of determining any liability under the Act,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by Celerity pursuant to Rule 424(b)(1) or (4) or 497(h) under
the Securities Act shall be deemed to be part of this Registration Statement as
of the time it was declared effective.
II-10
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this registration
statement to be signed on our behalf by the undersigned, in Knoxville,
Tennessee, October 17, 2001.
CELERITY SYSTEMS, INC.
By: /S/ KENNETH D. VAN METER.
-----------------------------
Name: Kenneth D. Van Meter
Title: President, Chief Executive Officer
and Chairman
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Kenneth D. Van Meter his true and lawful
attorney-in-fact and agent, with full power of substitution and revocation, for
him and in his name, place and stead, in any and all capacities (until revoked
in writing), to sign any and all amendments (including post-effective
amendments) to this Registration Statement and to file the same with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agent full power and authority to do and perform each and every act and thing
requisite and necessary to be done as fully for all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agent, or is substitute or substitutes, may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates stated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Kenneth D. Van Meter President, Chief Executive Officer, October 17, 2001
-------------------------------- Principal Accounting Officer and
Kenneth D. Van Meter Chairman of the Board of Directors
/s/ Fenton Scruggs Director October 17, 2001
--------------------------------
Fenton Scruggs
/s/ David Hultquist Director October 17, 2001
--------------------------------
David Hultquist
/s/ Bruce Thompson Director October 17, 2001
--------------------------------
Bruce Thompson
/s/ Edward Kidston Director October 17, 2001
--------------------------------
Edward Kidston
II-11