U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(MARK ONE)
|X| Quarterly Report Pursuant to Section 13 or 15(d) of
Securities Exchange Act of 1934
For the quarterly period ended SEPTEMBER 30, 2004
|_| Transition report under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from _______ to _______.
Commission File No. 814-00631
CELERITY SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Delaware 52-2050585
- --------------------------------------------- ------------------
(State or Other Jurisdiction of Incorporation (I.R.S. Employer
or Organization) Identification No.)
122 Perimeter Park Drive, Knoxville, Tennessee 37922
- ---------------------------------------------- ---------
(Address of Principal Executive Offices) (Zip Code)
(865) 539-5300
(Issuer's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.001 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the past
12 months, and (2) has been subject to such filing requirements for the past 90
days.
Yes |X| No |_|
Indicate by check mark whether the registrant is an accelerated filed (as
defined in Rule 12b-2 of the Exchange Act).
Yes |_| No |X|
There were 4,737,126,452 shares of common Stock outstanding as of October
27, 2004.
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CELERITY SYSTEMS, INC.
Condensed Balance Sheets
(unaudited)
September 30, December 31,
2004 2003
------------ ------------
Assets
Cash $ 27,537 $ 56,156
Other current assets 16,144 6,764
------------ ------------
Total current assets 43,681 62,920
------------ ------------
Fixed assets, net 38,575 38,317
Investment in Yorkville Advisors Management, LLC, at cost which
approximates fair value 5,240,000 5,240,000
Investment in and advances to Celerity Systems-NV, at fair value -- --
Debt offering costs, net 100,762 165,903
------------ ------------
Total assets $ 5,423,018 $ 5,507,140
============ ============
Liabilities and Stockholders' Equity
Accounts payable $ 489,763 $ 463,552
Judgments and defaults payable (including $213,400 to a related party) 428,400 570,781
Accrued interest ( including $171,516 and $126,416 to a related party) 274,137 270,746
Notes payable - related party 10,000 115,000
Other current liabilities 12,551 16,867
------------ ------------
Total current liabilities 1,214,851 1,436,946
Convertible debentures - related party, net 544,614 570,727
Convertible debentures, net 1,698,950 1,518,758
------------ ------------
2,243,564 2,089,485
------------ ------------
Total liabilities 3,458,415 3,526,431
------------ ------------
Commitments and contingencies -- --
Stockholders' Equity
Common stock, $.001 par value, 5,000,000,000 shares authorized, 4,737,126,452
issued and outstanding at September 30, 2004 and
4,553,473,409 issued and outstanding at December 31, 2003 4,737,126 4,553,473
Additional paid-in capital 40,599,551 40,544,690
Net unrealized depreciation on investments (1,075,223) (842,121)
Accumulated deficit (42,296,851) (42,275,333)
------------ ------------
Total stockholders' equity 1,964,603 1,980,709
------------ ------------
Total liabilities and stockholders' equity $ 5,423,018 $ 5,507,140
============ ============
The accompanying notes are an integral part of these condensed financial
statements
2
CELERITY SYSTEMS, INC.
Condensed Statements of Operations
Unaudited
Prior to Becoming
As a Business As a Business As a Business As a Business Business
Development Development Development Development Development
Company Company Company Company Company
--------------- --------------- --------------- --------------- ---------------
Three Months Three Months Nine Months Period from Period from
Ended Ended Ended June 3, 2003 to January 1, 2003
September 30, September 30, September 30, September 30, to June 2,
2004 2003 2004 2003 2003
--------------- ------------- --------------- ------------- -------------
Unrealized loss on investments $ (8,141) $ -- $ (233,103) $ -- $ --
Dividend income - related party 260,000 955,000 -- --
--------------- ------------- --------------- ------------- -------------
251,859 -- 721,897 -- --
General and administrative expenses 181,684 107,644 514,212 152,571 301,483
--------------- ------------- --------------- ------------- -------------
Operating income (loss) 70,175 (107,644) 207,685 (152,571) (301,483)
Other income (expense)
Amortization of debt offering costs (16,154) (261,710) (65,141) (252,353) (95,062)
Beneficial conversion feature - (354,701) (196,080)
convertible debentures (35,688) (369,951) (259,266) (227,292) (202,402)
Interest expense (88,183) (218,359) (180,208) 525,157 176,095
Settlement of debt 1,218 525,157 41,196
Other income 1,114
--------------- ------------- --------------- ------------- -------------
Total other income (expense) (138,807) (324,863) (462,305) (309,189) (317,449)
--------------- ------------- --------------- ------------- -------------
Net income (loss) attributable to
common shareholders $ (68,632) $ (432,507) $ (254,620) $ (461,760) $ (618,932)
=============== ============= =============== ============= =============
Loss per common share, basic and diluted
Net loss per common share attributable to
common shareholders $ -- $ -- $ -- $ -- $ --
=============== ============= =============== ============= =============
Weighted average shares outstanding -
basic and diluted 4,672,900,005 812,340,803 4,719,002,971 738,532,286 283,614,763
=============== ============= =============== ============= =============
The accompanying notes are an integral part of these condensed financial
statements
3
CELERITY SYSTEMS, INC.
Condensed Statements of Cash Flows
Unaudited
Prior to
becoming a
As a Business As a Business Business
Development Development Development
Company Company Company
--------- --------- ---------
Nine Months Period from Period from
Ended June 3, 2003 to January 1, 2003
September 30, September 30, to June 2,
2004 2003 2003
--------- --------- ---------
Cash flows from operating activities:
Net loss $(254,620) $(461,760) $(618,932)
Adjustments to reconcile net loss to net
cash used in operating activities:
Settlement of debt 1,218 (534,384) (176,095)
Unrealized loss on investments 233,103 280,858
Depreciation and amortization 6,400 -- 17,289
Abandonment of fixed assets 46,561
Beneficial conversion - convertible notes 311,579 354,701 196,080
Amortization of debt offering costs 65,141 252,353 94,063
Changes in operating assets and liabilities:
Other current assets (9,380) (10,733) (34,322)
Accounts payable 26,211 7,463 154,541
Judgments and defaults payable (142,381) --
Accrued interest 2,174 --
Other current liabilities (4,318) (8,479) 8,479
--------- --------- ---------
Net cash provided by (used in) operating activities 235,127 (119,981) (312,336)
Cash flows from investing activities:
Purchase of fixed assets (6,658) --
Advances to Celerity Systems-NV (233,102) (280,858)
--------- --------- ---------
Net cash used in investing activities (239,760) (280,858) --
Cash flows from financing activities:
Proceeds from notes payable - related party 20,000 25,000
Payments on notes payable - related party (105,000) --
Proceeds from convertible debentures 537,500 81,955 283,500
Principal payments on debt (475,000) --
Financing and debt issuance costs -- (15,500)
Acquisition of treasury stock (189,808)
Proceeds from issuance of common stock 208,322 428,500 --
--------- --------- ---------
Net cash (used in) provided by financing activities (23,986) 514,955 308,500
Net increase (decrease) in cash (28,619) 114,116 (3,836)
Cash, beginning of period 56,156 1,176 5,012
--------- --------- ---------
Cash, end of period $ 27,537 $ 115,292 $ 1,176
========= ========= =========
Cash paid for:
Interest $ 201,285 $ -- $ --
--------- --------- ---------
Taxes (State franchise taxes) $ 1,450 $ -- $ --
========= ========= =========
The accompanying notes are an integral part of these condensed financial
statements
4
CELERITY SYSTEMS, INC.
Condensed Statement of Changes in Stockholders' Equity
Unaudited
Common Stock Additional
--------------------------------- Paid-In
Shares Amount Capital
-------------- -------------- --------------
Balance, December 31, 2003 4,553,473,409 $ 4,553,473 $ 40,544,690
Issuance of common stock 140,000,000 140,000 68,322
Conversion of convertible debentures to shares of common stock 184,251,567 184,251 35,749
Acquisition of treasury stock
Retirement of treasury stock (140,598,524) (140,598) (49,210)
Net income (loss)
-------------- -------------- --------------
Balance, September 30, 2004 4,737,126,452 $ 4,737,126 $ 40,599,551
============== ============== ==============
Net Unrealized Total
Treasury Depreciation Accumulated Stockholders'
Stock on Investments Deficit Equity
-------------- -------------- -------------- --------------
Balance, December 31, 2003 $ -- $ (842,121) $ (42,275,333) $ 1,980,709
Issuance of common stock 208,322
Conversion of convertible debentures to shares of common stock 220,000
Acquisition of treasury stock (189,808) (189,808)
Retirement of treasury stock 189,808 --
Net income (loss) (233,102) (21,518) (254,620)
-------------- -------------- -------------- --------------
Balance, September 30, 2004 $ -- $ (1,075,223) $ (42,296,851) $ 1,964,603
============== ============== ============== ==============
The accompanying notes are an integral part of these condensed financial
statements
5
CELERITY SYSTEMS, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
OVERVIEW
The Company is a business development company that has elected to be
regulated pursuant to Section 54 of the Investment Company Act of 1940. We
intend to focus our investments in developing companies, but do not intend to
limit our focus on investment in any particular industry. We intend to seek
investments in companies that offer attractive investment opportunities.
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 September 30, 2004 and for
the nine months ended September 30, 2004 and 2003, are unaudited. The
accompanying interim unaudited financial statements have been prepared by the
Company in accordance with accounting principles generally accepted in the
United States for interim financial statements and pursuant to the requirements
for reporting on Form 10-Q and Article 10 of Regulation S-X. 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 adjustments)
considered necessary for a fair presentation have been included. Operating
results for the nine month period ended September 30, 2004, are not necessarily
indicative of the results that may be expected for the year ended December 31,
2004. The condensed financial statements should be read in conjunction with the
financial statements and notes thereto included in the Form 10K of the Company
as of and for the year ended December 31, 2003. Certain prior period balances
have been reclassified to conform with the September 30, 2004 financial
statement presentation.
On May 20, 2003, the Company formed a subsidiary, Celerity Systems, Inc.
(a Nevada corporation), ("Celerity NV"). The assets and liabilities related to
the existing interactive video business were transferred to Celerity NV for 100%
of the common stock. As this subsidiary is not an investment company, after June
2, 2003 it is not consolidated with the parent company. The Company's investment
in Celerity NV is recorded at fair value, represented as cost, plus or minus
unrealized appreciation or depreciation, respectively.
In accordance with Article 6 of Regulation S-X under the Securities Act of
1933 and Securities Exchange Act of 1934, the Company does not consolidate
portfolio company investments in which the Company has a controlling interest.
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. Since inception in January, 1993 through September 30, 2004 the
losses total approximately $43,372,000. As of September 30, 2004, the Company
had a negative net working capital of approximately $1,171,000. These factors
taken together with the lack of sales and the absence of significant financial
commitments raise substantial doubt about the Company's ability to continue as a
going concern.
6
On June 3, 2003, the Company elected to become a Business Development
Company which is regulated under Section 54 of the Investment Company Act of
1940. On June 4, 2003 the Company filed an Offering Circular Under Regulation E
to sell up to $4,500,000 of its common stock at a minimum price of $0.001 to a
maximum price of $0.02. Between June 30, 2003 and September 30, 2004 the Company
sold 1,299,833,333 shares resulting in net proceeds of $1,376,500.
There can be no assurances that the Company will be successful in its
attempts to raise sufficient capital essential to its survival. To the extent
that the Company is unable to raise the necessary operating capital it will
become necessary to further curtail operations. Additionally, even if the
Company does raise operating capital, there can be no assurances that the net
proceeds will be sufficient enough to enable it to develop its business to a
level where it will generate profits and positive cash flows. The financial
statements do not include any adjustments relating to the recovery of the
recorded assets or the classification of the liabilities that might be necessary
should the Company be unable to continue as a going concern.
CONVERSION TO BUSINESS DEVELOPMENT COMPANY
The operating results for the nine months ended September 30, 2004 and for
the period from June 3, 2003 to September 30, 2003 reflect the Company's results
as a business development company under the Investment Company Act of 1940, as
amended, whereas the operating results for the period from January 1, 2003 to
June 2, 2003 reflect the Company's results prior to operating as a business
development company. Accounting principles used in the preparation of the
financial statements for the interim periods ended September 30, 2004 and
September 30, 2003 and the financial statements for the interim periods are
different and, therefore, the results of operations are not directly comparable.
The primary differences in accounting principles relate to the carrying value of
investments.
STOCK-BASED COMPENSATION
The Company had no stock options granted in 2004 and 2003. 1,500,000
shares valued at approximately $2,250 were authorized to be issued as
stock-based compensation determined under the fair value method during the nine
months ended September 30, 2004 (none in 2003).
2. INVESTMENT IN CELERITY SYSTEMS, INC. (A NEVADA CORPORATION)
The following table represents Celerity NV's statement of operations for
the nine months ended September 30, 2004.
Sales $ --
Cost of Sales
--
-----------
Gross loss --
General and administrative expenses 214,221
------------
Net loss $ (214,221)
===========
The following table represents Celerity NV's balance sheet as of September
30, 2004.
Total current assets $
------------
Total assets $ -0-
Accounts payable $ 72,763
Advances from Celerity Systems, Inc.
575,223
Other current liabilities 6,000
------------
Total liabilities
653,986
------------
Stockholder Deficiency
Common stock
250
Additional paid-in capital 499,750
Accumulated deficiency ( 1,153,986)
------------
Total stockholder deficiency ( 653,986)
------------
Total liabilities and stockholder deficiency $ -0-
============
7
Celerity NV developed and manufactured, at third party plants, digital set
top boxes and digital video servers for the interactive television and high
speed Internet markets. Celerity NV also provided a comprehensive content
package for education users with over 1,300 titles available. Due to a lack of
profitable operations, Celerity NV has decided to terminate its operations and
orderly liquidate its interactive video business. As a result Celerity NV
recorded reserve adjustments aggregating $1,882,000. These write downs result
from a cost recovery approach to valuation of the business assets.
The Company has charged Celerity NV for salaries and benefits and a
portion of costs as a facility charge. During the first nine months of 2004, the
Company advanced $233,103 to Celerity NV to fund operations. This amount
resulted in an unrealized depreciation on the investment in Celerity NV of
$233,103 as reflected in the statement of operations of the Company as a BDC.
3. LOSS PER SHARE
Basic and diluted loss per share were computed by dividing net loss
attributable to common stock by the weighted average number of 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 net loss and their effect would be anti-dilutive.
4. ISSUANCE OF CONVERTIBLE DEBENTURES
The long-term debt of the Company includes the following items:
September 30, December 31,
2004 2003
----------- ----------
4% convertible debentures $ 12,500 $ 67,500
5% convertible debentures - 2003 1,300,000 1,475,000
5% convertible debentures - 2004 537,500 -0-
10% secured convertible debenture 705,000 1,170,000
----------- ----------
2,555,000 2,712,500
Less:Unamortized debt discount (311,436) (623,015)
----------- ----------
Long-term debt less current maturities $ 2,243,564 $2,089,485
=========== ==========
During the nine months ended September 30, 2004 the Company issued 133,859,447
shares of its common stock upon the conversion of $165,000 of 5% convertible
debentures - 2003 and 50,392,120 shares of its common stock upon the conversion
of $55,000 of 4% convertible debentures. These transactions have been accounted
for as non-cash investing and financing activities for the statement of cash
flows.
5. DIVIDEND INCOME
During the nine month period ended September 30, 2004 the company received
$955,000 in proceeds from its investment in Yorkville Advisors Management, LLC
and has recorded the amounts as dividend income in the statement of operations.
Since its investment in Yorkville Advisors Management, LLC on December 1, 2003,
the Company has received a total of $1,020,000 in proceeds. Yorkville Advisors
has no set dividend policy. Dividends are declared based on the discretion of
the management of Yorkville Advisors.
6. JUDGMENTS AND DEFAULTS PAYABLE
In January 2002, the Company terminated the Equity Line of Credit entered
into on September 14, 2001 due to delays in getting related shares registered
and in order to pursue other types of financing arrangements. As a result, the
Company does not have an effective registration statement including common
shares to be issued in connection with certain debentures issued in 2001 and the
first quarter of 2002 under the 1999 Line of Credit Agreement. The Company is
required to pay liquidated damages in the form of increased interest on the
convertible debentures as a result of not filing an effective registration
statement for these debentures at a rate of 2% of the principle plus interest
per month. The liability for liquidated damages continued to accrue until one
year from the issuance date of the convertible debentures. The Company has
accrued and unpaid liquidated damages of $249,400 at September 30, 2004.
8
In December, 2001, Veja Electronics, Inc. d/b/a Stack Electronics sued the
Company for breach of contract and is seeking damages in excess of $106,000.
This action relates to amounts alleged to be owed from the cancellation of a
purchase order. During 2003 a judgment was rendered against the Company in the
amount of $71,000, which has been accrued at September 30, 2004.
On October 27, 2001, we defaulted on payment due of $100,000, plus accrued
interest, on a certain unsecured note. We have made arrangements for the payment
of this obligation and it was paid in full in October 2004.
In 2003, Del Rio Enterprises sued the Company for non-payment of services
rendered. During 2003 a judgment was rendered against the Company in the amount
of $8,000. This amount has been accrued at September 30, 2004.
7. LITIGATION
On September 20, 2004, Joseph Banta, et al. filed an action in the United
States District Court for the Eastern District of Tennessee at Knoxville,
Tennessee in the amount of approximately $60,000 for non-payment of salaries and
benefits during a two-month period in 2002. The Company has accrued costs for
these claims and will vigorously defend against any further liability.
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. These amounts are included in the Company's accounts payable and are
accruing applicable late fees and interest.
8. COMMON STOCK
During the nine months ended September 30, 2004 the Company issued
140,000,000 shares of its common stock for cash proceeds in the amount of
$193,500 to third party investors.
The Company also completed a transaction with Eagle Broadband in which the
Company purchased 140,598,524 shares of its common stock and repaid a $350,000
convertible debenture from Eagle Broadband. The Company paid Eagle Broadband
$662,308 for the purchase of these shares ($189,808) for the retirement of the
remaining $350,000 portion of a $500,000 convertible note held by Eagle
Broadband and $122,500, net of a gain on the settlement of debt of $39,797, for
interest and penalties on these securities. The Company's Board of Directors has
approved a motion to cancel the shares and make them available for issuance in
the future.
9. SUBSEQUENT EVENT
On October 13, 2004 the Company's Board of Directors approved a plan to
buyback up to 500,000,000 shares of the Company's common stock on the open
market over the next twelve months.
On November 4, 2004, the Company's subsidiary Celerity NV entered into an
asset purchase agreement with Escent Systems, Inc. ("Escent"). Under the
agreement Escent purchased all of the inventory associated with the digital set
box business by giving Celerity NV a 25% equity ownership interest in Escent. In
addition, Celerity NV provided Escent with $15,000 in cash for its working
capital needs. Escent will provide the digital set top box business clients with
customer and technical support and will use its reasonable best efforts to
engage content providers to service these clients.
9
ITEM 2. MANAGEMENT'S PLAN OF OPERATION AND DISCUSSION AND ANALYSIS
INTRODUCTORY STATEMENTS
Forward-Looking Statements and Associated Risks. This filing contains
forward-looking statements, including statements regarding, among other things,
(a) our company's projected sales and profitability, (b) our company's growth
strategies, (c) anticipated trends in our company's industry, (d) our company's
future financing plans and (e) our Company's anticipated needs for working
capital. In addition, when used in this filing, the words "believes,"
"anticipates," "intends," "in anticipation of," "expects," and similar words are
intended to identify forward-looking statements. These forward-looking
statements are based largely on our Company's expectations and are subject to a
number of risks and uncertainties, including those described in "Business Risk
Factors" of our Form 10-K for the year ended December 31, 2003. Actual results
could differ materially from these forward-looking statements as a result of
changes in trends in the economy and the Company's industry, demand for the
Company's products, competition, reductions in the availability of financing and
availability of raw materials, and other factors. In light of these risks and
uncertainties, there can be no assurance that the forward-looking statements
contained in this filing will in fact occur.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires our management to
make assumptions, estimates and judgments that affect the amounts reported in
the financial statements, including the notes thereto, and related disclosures
of commitments and contingencies, if any. We consider our critical accounting
policies to be those that are complex and those that require significant
judgments and estimates in the preparation of our financial statements,
including valuation of our investments. Management relies on historical
experience and on other assumptions believed to be reasonable under the
circumstances in making its judgment and estimates. Actual results could differ
materially from those estimates.
Estimates- The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
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 items
included in working capital approximates fair value because of the short
maturity of those instruments. The carrying value of the Company's 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.
Debt Offering Costs - Debt offering costs are related to private
placements and are being amortized on a straight line basis over the term of the
related debt, most of which is in the form of convertible debentures. Should
conversion occur prior to the stated maturity date the remaining unamortized
cost is expensed.
On May 20, 2003, the Company formed a subsidiary, Celerity Systems, Inc.
(a Nevada corporation), ("Celerity NV"). The assets and liabilities related to
the existing interactive video business were transferred to Celerity NV for 100%
of the common stock. As this subsidiary is not an investment company, after June
2, 2003 it is not consolidated with the parent company. The Company's investment
in Celerity NV is recorded at fair value, represented as cost, plus or minus
unrealized appreciation or depreciation respectively. As described in Note 8 to
the Unaudited Condensed Financial Statements, on November 4, 2004, Celerity NV
has agreed to sell its set top box business to Escent Systems, Inc. for a 25%
equity ownership in Escent.
Investment Valuation - Investments in equity securities are recorded at
fair value, represented at cost, plus or minus unrealized appreciation or
depreciation, respectively. The fair value of investments that have no ready
market, are determined in good faith by management, and approved by the Board of
Directors, based upon assets and revenues of the underlying investee companies
as well as general market trends for businesses in the same industry. Because of
the inherent uncertainty of valuations, management's estimates of the values of
the investments may differ significantly from the values that would have been
used had a ready market for the investments existed and the differences could be
material.
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. A valuation allowance
related to the deferred tax assets is also recorded when it is more likely than
not that some or all of the deferred tax asset will not be realized.
10
Going Concern - The Company's financial statements have been prepared on a
going concern basis, which contemplates the realization of asset 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. Since inception in January 1993 through September 30, 2004,
the losses total approximately $43,372,000. As of September 30, 2004, the
Company has a negative net working capital of approximately $1,171,000. These
factors taken together with the lack of sales and the absence of significant
financial commitments raise substantial doubt about the Company's ability to
continue as a going concern. The Company's source of income during 2004 has been
its minority investment in Yorkville Management Advisors, LLC. The Company's
investment in the minority interest of Yorkville Management Advisors, LLC was
made on December 1, 2003 and the Company has received $1,020,000 in dividend
proceeds since that date.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 2003
UNREALIZED LOSS ON INVESTMENTS
Since the election to operate as a BDC the Company has recorded an
unrealized loss on its investment in Celerity Systems-NV. This loss is comprised
of two elements:
Effect of recording advances at fair value $ 575,223
Effect of recording equity investments at fair value 500,000
------------
$ 1,075,223
During the three month period ended September 30, 2004, Celerity NV
recorded no sales or gross profit other than partial liquidation of inventories
and other general and administrative expenses that resulted in a net loss of
$79,448 for the period. During such period Celerity NV received advances from
the Company of $8,141 to fund its working capital requirements. Management
recorded a write-down of the Company's advances since the Company has decided to
terminate its operations through an orderly liquidation of the business.
DIVIDEND INCOME
During the three month period ended September 30, 2004 the company
received $260,000 in proceeds from its investment in Yorkville Advisors which
has been recorded as dividend income in the statement of operations. Since its
investment in Yorkville Advisors on December 1, 2003, the Company has received a
total of $1,020,000 in proceeds. Yorkville Advisors has no set dividend policy.
Dividends are declared based on the discretion of the management of Yorkville
Advisors.
OPERATING EXPENSES
Operating expenses for the third quarter of 2004 were $181,684 compared to
the third quarter of 2003 of $107,644. Increased operating expenses in 2004 can
be attributed to higher personnel expenses of approximately $20,000 and expenses
for operating, legal, accounting and other professional services of
approximately $54,000. Expenses were generally higher in 2004 due to the
increased activity by personnel and general operating levels especially
professional services and facilities charges.
AMORTIZATION OF DEBT OFFERING COSTS
Amortization of debt offering costs for the third quarter of 2004 was
$16,154 compared to $261,710 in same period of 2003. This cost for the 2003
period was due to the reduction of debt instruments and the related write off of
cost associated with them.
11
BENEFICIAL CONVERSION FEATURE - CONVERTIBLE NOTES
Non-cash interest expense relating to amortization of a beneficial
conversion feature for the various convertible debentures issues amounted to
$35,688 and $369,951 for the three months ended September 30, 2004 and 2003,
respectively. This decrease results primarily from the conversion of certain
debt to equity issued in 2003 which caused full recognition of the cost of the
related beneficial conversion feature in this period compared to the normally
longer amortization period for debt not converted.
INTEREST EXPENSE
Interest expense for the three months ended September 30, 2004 was $88,183
compared to $218,359 for the same period in 2003. The reduction from 2003 is due
primarily to the amount of liquidating damages ($146,540) recorded on the
default of certain outstanding debentures in 2003.
SETTLEMENT OF DEBT
For the three months ended September 30, 2004, the Company settled certain
trade and notes payables wherein the total amount due was reduced by $1,218
compared to $525,157 for the three months ended September 30, 2003.
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS
As a result of the foregoing, Celerity had a net loss of $68,632, or $0.00
per share, for the three months ended September 30, 2004 compared to a net loss
of $432,507, or $0.00 per share, for the three months ended September 30, 2003.
NINE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 2003
UNREALIZED LOSS ON INVESTMENTS
Since the election to operate as a BDC the Company has recorded an
unrealized loss on its investment in Celerity Systems-NV. This loss is comprised
of two elements:
Effect of recording advances at fair value $ 575,223
Effect of recording equity investments at fair value
500,000
------------
$ 1,075,223
============
During the nine month period ended September 30, 2004, Celerity NV
recorded no sales or gross profit other thaN partial liquidation of inventories
and other general and administrative expenses that resulted in a net loss of
$214,223 for the period. During such period Celerity NV received advances from
the Company of $233,103 (net of cash recoveries from liquidation of inventories
of $61,015) to fund its working capital requirements. Management recorded a
write-down of the Company's advances since the Company has decided to terminate
its operations through an orderly liquidation of the business.
DIVIDEND INCOME
During the nine month period ended September 30, 2004 the Company received
$955,000 in proceeds from its investment in Yorkville Advisors which has been
recorded as dividend income in the statement of operations. Since its investment
in Yorkville Advisors on December 1, 2003, the Company has received a total of
$1,020,000 in proceeds. Yorkville Advisors has no set dividend policy. Dividends
are declared based on the discretion of the management of Yorkville Advisors.
This was the Company's only source of income for the nine months ended September
30, 2004.
OPERATING EXPENSES
Operating expenses for the first nine months of 2004 were $514,212
compared to the first nine months of 2003 of $454,054. Increased operating
expenses in 2004 can be attributed to higher personnel expenses of approximately
$81,000 and expenses for operating, legal, accounting and other professional
services of approximately $71,000. Increased expenses in 2004 were offset by not
having the non-recurring charges for corporate asset abandonment and state sales
and use tax assessments of approximately $91,000 that were incurred in 2003.
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AMORTIZATION OF DEBT OFFERING COSTS
Amortization of debt offering costs for the first nine months of 2004 was
$65,141 compared to $347,415 in same period of 2003. This cost for the 2003
period was due to the reduction of debt instruments and the write off of the
related cost associated with them.
BENEFICIAL CONVERSION FEATURE - CONVERTIBLE NOTES
Non-cash interest expense relating to amortization of a beneficial
conversion feature for the various convertible debentures issues amounted to
$259,266 and $354,701 for the nine months ended September 30, 2004 and 2003,
respectively. This decrease results primarily from the conversion of certain
debt to equity in 2003 that caused full recognition of the cost of the related
beneficial conversion feature in the 2003 period compared to the normally longer
amortization period for debt not converted.
INTEREST EXPENSE
Interest expense for the nine months ended September 30, 2004 was $180,208
compared to $429,694 for the same period in 2003. This reduction is from two
areas. First, liquidated damages incurred due to the late filing of certain
registration statements resulting in a charge of $-0- in the first nine months
of 2004 compared to a charge of $175,060 in for the same period in 2003. Second,
the lesser interest expense resulted from the lower level of debt at September
30, 2004 ($1,860,000 average balance) as compared to the same period in 2003
($3,100,000 average balance).
SETTLEMENT OF DEBT
For the nine months ended September 30, 2004, the Company settled certain
trade and notes payables wherein the total amount due was reduced by $41,196
compared to a benefit of $701,252 for the same period in 2003.
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS
As a result of the foregoing, Celerity had a net loss of $254,620, or
$0.00 per share, for the nine months ended September 30, 2004 compared to a net
loss of $1,080,692, or $0.00 per share, for the nine months ended September 30,
2003.
LIQUIDITY AND CAPITAL RESOURCES
The primary source of financing for us since our inception has been
through the issuance of common and preferred stock and debt. We had cash
balances on hand of $27,537 as of September 30, 2004 and $56,156 as of December
31, 2003. Our cash position continues to be uncertain. Our primary need for cash
is to fund our ongoing operations until such time that consistent income from
our investments generates enough proceeds to fund operations. In addition, our
need for cash includes satisfying current liabilities of $1,214,851, consisting
primarily of accounts payable of $489,763, accrued interest of $274,137 and
judgments and defaults payable of $428,400, including a judgment of $71,000
obtained by Veja Electronics, Inc. for breach of contract and a judgment of
$8,000 obtained by Del Rio Enterprises for non-payment of services. Additionally
this also includes notes payable in default of $100,000 and liquidated damages
of $249,000 resulting from the lack of filing a registration statement relating
to certain convertible debentures. We do not currently have sufficient funds to
pay these obligations. We will need significant new funding from the sale of
securities or from proceeds from our investments to fund our ongoing operations
and to satisfy the above obligations. We anticipate the dividend income from our
investment in Yorkville Advisors Management will be sufficient to operate the
Company. We currently do not have any commitments for funding.
As discussed in the overview section, on September 3, 2003 the Company
elected to become a BDC which is regulated under Section 54 of the Investment
Company Act of 1940. As a BDC the Company may sell shares of its common stock up
to $5,000,000 in a twelve month period. Shares sold are exempt from registration
under Regulation E of the Securities Act of 1933. To that end, at our Annual
Meeting of Shareholders held on January 14, 2003, the shareholders approved an
increase in our authorized capital stock to 5 billion shares of common stock. On
September 4, 2003 the Company filed an Offering Circular Under Regulation E to
sell up to $4,500,000 of its common stock at a minimum price of $0.001 to a
maximum price of $0.02. Between September 4, 2003 and September 30, 2004 the
Company has sold 1,294,833,333 shares resulting in net proceeds of $1,366,500.
13
We are also looking at several other options in terms of improving our
cash shortage. 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. We have granted a security interest in our personal
property to the investors in the 10% convertible debentures issued in 2002. Such
security interests may hinder our efforts to obtain financing. The lack of
revenues or a significant financial commitment raises substantial doubt about
our ability to continue as a going concern or to maintain a full-scale level of
operations.
On October 13, 2004 the Company's Board of Directors approved a plan to
buyback up to 500,000,000 shares of the Company's common stock on the open
market over the next twelve months.
During the nine months ended September 30, 2004, we had a net decrease in
cash of $28,619. Our sources and uses of funds were as follows:
CASH PROVIDED BY OPERATING ACTIVITIES. We generated net cash of $235,127
in our operating activities in the nine months ended September 30, 2004. Our net
cash provided from operating activities resulted primarily from non-cash
expenses of $609,822 related to the amortization of beneficial conversion
feature of debt, amortization of debt offering costs and the unrealized loss on
an investment. These non-cash items were directly offset due to the Company's
net loss of $254,620.
CASH USED IN INVESTING ACTIVITIES. We used net cash of $239,760 in
investing activities in the nine months ended September 30, 2004 of which
$233,102 was used to fund the operating activities of Celerity NV.
CASH USED IN FINANCING ACTIVITIES. We used $23,986 in net cash for
financing activities, consisting primarily of principal payments on long-term
debt of $475,000 and notes payable - related party of $105,000 and acquisition
of treasury stock. This was partially offset by proceeds from issuance of
convertible debentures of $537,500 and issuance of common stock of $208,322.
As of September 30, 2004 we had a negative net working capital of
approximately $1,171,000. Celerity NV has ceased operations and is selling its
business and assets in an orderly liquidation and has reduced overhead expenses,
which will have a favorable impact on cash required to fund the business. We had
no significant capital spending or purchase commitments at September 30, 2004
other than a certain lease of corporate office space and the funding of the
working capital of Celerity NV.
We have no existing bank lines of credit.
There can be no assurances that we will be successful in our attempts to
raise sufficient capital essential to our survival. To the extent that we are
unable to raise the necessary operating capital it will become necessary to
further curtail operations. Additionally, even if we raise operating capital,
there can be no assurances that the net proceeds will be sufficient enough to
enable us to develop our business to a level where we will generate profits and
positive cash flows. These matters raise substantial doubt about our ability to
continue as a going concern.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE SENSITIVITY
The Company does not have any exposure to market risk as it relates to
changes in interest rates as all of the borrowings of the Company are at a fixed
rate of interest.
14
The Company has no cash equivalents or short-term investment which are
subject to market risk.
FOREIGN CURRENCY RISK
The Company does not do any business that has any risk of foreign exchange
rate fluctuations.
EQUITY SECURITY PRICE RISK
We do not have any investment in marketable equity securities; therefore,
we do not have any direct equity price risk.
COMMODITY PRICE RISK
We no not do any business involving commodities; therefore, we do not have
any commodity price risk.
ITEM 4. CONTROLS AND PROCEDURES
(A) Evaluation Of Disclosure Controls And Procedures
As of the end of the period covered by this report, the Company carried
out an evaluation, under the supervision and with the participation of the
Company's Principal Executive Officer/Acting Principal Financial Officer (one
person), of the effectiveness of the design and operation of the Company's
disclosure controls and procedures. The Company's disclosure controls and
procedures are designed to produce a reasonable level of assurance of achieving
the /Company's disclosure control objectives. The Company's Principal Executive
Officer/Acting Principal Accounting Officer has concluded that the Company's
disclosure controls and procedures are, in fact, effective at this reasonable
assurance level. In addition, we reviewed out internal controls, and there have
been no significant changes in our internal controls or in other actors that
could significantly affect those controls subsequent to the date of their last
valuation or from the end of the reporting period to the date of this Form 10-Q.
(B) Changes In Internal Controls Over Financial Reporting
In connection with the evaluation of the Company's internal controls
during the Company's nine months ended September 30, 2004, the Company `s
Principal Executive Officer/Principal Financial Officer (one person) has
determined that there are no changes to the Company's internal controls over
financial reporting that has materially affected, or is reasonably likely to
materially effect, the Company's internal controls over financial reporting.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There is no pending litigation against us, other than those claims
described below:
o In December 2001, Veja Electronics, Inc. d/b/a Stack Electronics
sued us for breach of contract and is seeking damages in excess of
$106,000 for products not received by us. During 2003, a judgment
was rendered against the Company in the amount of $71,000.
o On October 27, 2001, we defaulted on payments due of $100,000, plus
accrued interest, on an unsecured note. Written demand has been
received and we have made arrangements with the note holder. The
obligation was paid in full in October 2004.
15
o In 2003, Del Rio Enterprises sued the Company for non-payment of
services rendered. During 2003 a judgment was rendered against the
Company in the amount of $8,000.
o On September 20, 2004, Joseph Banta, et al. filed an action in the
United States District Court for the Eastern District of Tennessee
at Knoxville, Tennessee in the amount of approximately $60,000 for
non-payment of salaries and benefits during a two-month period in
2002. The Company has accrued costs for these claims and will
vigorously defend against any further liability.
o 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 us.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the nine months ended September 30, 2004, the Company issued
133,859,447 shares of its common stock upon the conversion of $165,000 of 5%
convertible debentures - 2003 and 50,392,120 shares of its common stock upon the
conversion of $55,000 of 4% convertible debentures.
The Company also completed a transaction with Eagle Broadband in which the
Company purchased 140,598,524 shares of its common stock and repaid a $350,000
convertible debenture from Eagle Broadband. The Company paid Eagle Broadband
$662,308 for the purchase of these shares ($189,808) for the retirement of the
remaining $350,000 portion of a $500,000 convertible note held by Eagle
Broadband and $122,500, net of a gain on the settlement of debt of $39,797, for
interest and penalties on these securities. The Company's Board of Directors has
approved a motion to cancel the shares and make them available for issuance in
the future.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
On October 27, 2001, we defaulted on payments due of $100,000, plus
accrued interest, on an unsecured note. Written demand has been received and we
have made arrangements with the note holder. The obligation was fully satisfied
in October 2004.
The Company is in default on $942,500 of convertible debentures for
failure to file an effective registration statement.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
Not applicable.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS.
EXHIBIT NO. DESCRIPTION LOCATION
- ----------- ----------- --------
31.1 Certification re: Section 302 Provided herewith
32.1 Certification re: Section 906 Provided herewith
(B) REPORTS ON FORM 8-K.
None.
17
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: November 12, 2004 CELERITY SYSTEMS, INC.
By:/s/ Robert Legnosky
-----------------------------------
Robert Legnosky
Chief Executive Officer and
Interim Chief Financial Officer
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