FORM 10-KSB
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended: July 31, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from _______________ to
________________
Commission file number 0-11485
ACCELR8 TECHNOLOGY CORPORATION
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(Name of small business issuer in its charter)
Colorado 84-1072256
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
303 East Seventeenth Avenue, Suite 108, Denver, Colorado 80203
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(Address of principal executive offices)
Issuer's telephone number: (303) 863-8088
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, no par value
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the issuer was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
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Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of issuer's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
State issuer's revenues for its most recent fiscal year: $2,488,374
As of September 30, 1997, the aggregate market value for the 5,237,407 shares of
the Common Stock, no par value per share, held by non-affiliates was
approximately $89,035,919.
The number of shares of Common Stock of the registrant outstanding as of July
31, 1997, were 6,692,507.
Documents incorporated by reference
None
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TABLE OF CONTENTS
PART I PAGE
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Item 1. Description of Business ........................................ 1
Item 2. Description of Property ........................................
Item 3. Legal Proceedings ..............................................
Item 4. Submission of Matters to a Vote of Security Holders ............
PART II
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Item 5. Market for Common Equity and Related Stockholder Matters .......
Item 6. Management's Discussion and Analysis or Results of Operations ..
Item 7. Financial Statements ...........................................
Item 8. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure .......................................
PART III
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Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act ..............
Item 10. Executive Compensation .........................................
Item 11. Security Ownership of Certain Beneficial Owners and Management .
Item 12. Certain Relationships and Related Transactions .................
Item 13. Exhibits and Reports on Form 8-K ...............................
SIGNATURES .......................................................................
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PART I
Item 1 - Description of Business
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Except for historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. Such forward-looking statements include, but are not limited to,
statements regarding future events and the Company's plans and expectations. The
Company's actual results could differ materially from those discussed herein.
Factors that could cause or contribute to such differences include, but are not
limited to, those discussed below under "Factors That May Affect Future
Results," as well as those discussed elsewhere in this Form 10-KSB.
Certain capitalized terms used in this Form 10-KSB are defined in the
Glossary beginning at the end of "Item 1-Description of Business" beginning on
page 1.
Introduction
Accelr8 Technology Corporation (the "Company") is a leading provider of
software tools and consulting services for Year 2000 compliance and for
conversion from Digital Equipment Corporation's ("DEC") VAX/VMS Legacy Systems
to UNIX and NT open client/server environments. The Year 2000 Problem is
expected to create widespread system failures due to the use of computer
programs that rely on two-digit date codes to perform computations and other
decision-making functions. The Company's "NAVIG8-2000" tools facilitate timely
and cost effective Year 2000 assessment and remediation across the multiple
language environment of DEC Legacy Systems and UNIX environments. The Company's
other focus - the conversion from DEC VAX/VMS Legacy Systems to UNIX open
client/server environments - is based on the fact that VAX/VMS Legacy Systems
use a proprietary computer operating system which is not compatible with other
manufacturers' hardware and software, whereas UNIX is a powerful, open
architecture system which is compatible with a wide range of hardware platforms
and software applications, including commercial off-the-shelf software ("COTS").
The Company believes that UNIX has become the most widely used client/server
operating system, and that the trend to client/server open systems, such as the
systems offered by UNIX and Microsoft Corporation's Windows NT operating system
("NT"), will continue for the foreseeable future. The Company's "MIGR8" tools
provide dependable solutions for migration of DEC VAX applications from the
proprietary environment of VMS to the open systems environment of UNIX.
The Year 2000 Problem. The Year 2000 Problem in computers arises from the
common practice of using two digits to represent a date in computer software
code and databases to save both processing time and storage. Therefore, when the
year 2000 arrives and computer programs read the date "00," the computer will
default to the year "1900" rather than the correct "2000." This could result in
incorrect calculations, faulty data and computer shutdowns, potentially
impairing the daily conduct of business. Since the 1960's, computer programmers
have designed systems using a two-digit date format in an effort to save what
has historically been costly storage space and processing time. Even as the cost
of disk storage fell (from $2,100 in 1963, and $432 in 1972 to only $1 per
megabyte now), the two-digit format remained a de facto standard. Additionally,
expectations were that computer systems built in the 1980's would be replaced by
the year 2000, which is clearly not the case in many business and government
computing environments. While DEC claims that VAX minicomputers and other
computers using the VMS operating system are designed to use four digits to
express dates, DEC customers may be using third party software packages as well
as custom programming that do not use four digit dates.
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While the actual fix to a single computer program of converting two-digit
dates to four-digit dates can be straightforward, managing and coordinating the
process between numerous programs and systems can be very complicated and highly
labor-intensive. Implementing and testing the changes has been estimated to
represent as much as 50% of the total cost. Several date conversion tools have
been developed to address the larger mainframe market; however, management knows
of only one other company whose product competes with the Company's Year 2000
product, and that product only addresses Year 2000 issues for the DEC COBOL base
of DEC VAX/VMS Legacy Systems customers. Because of the unique development
languages proprietary to the DEC VMS platform, early attempts at using tools for
the mainframe conversion marketplace have not been successful in this specific
mid-range market.
The Company approaches its clients' needs regarding the Year 2000 Problem
through its "NAVIG8-2000" suite of tools, methodologies and services designed to
assist with the identification, evaluation and conversion of date-related fields
to become Year 2000 compliant. The "NAVIG8-2000" software product is a set of
expert system tools for Open VMS and UNIX applications that identify variables
in code that are most likely to hold date information. Used in the delivery of a
Year 2000 Impact Analysis service, NAVIG8-2000 is the foundation of the
Company's solution to the millennium problem faced by DEC and UNIX users and
application developers. This combination of software tools and services enables
clients to complete Year 2000 compliance requirements in a predictable and
cost-effective manner. The Company believes the Year 2000 Problem is endemic
throughout DEC VMS and UNIX systems in use today and is expected to create
widespread system failures due to the use of computer programs that rely on
two-digit date codes to perform computations and decision-making functions. The
Company is developing software to address the Year 2000 Problem on NT systems.
Management expects this product to be available by the end of the 1997 calendar
year.
Migration to Open Systems. In the 1970's many businesses and governmental
organizations relied on mainframe and minicomputers for critical business
functions. Each hardware manufacturer sought to establish a competitive
advantage by developing "closed" environments which were compatible only with
the manufacturer's proprietary equipment and software applications. Thus a
customer was locked into a mission-critical application environment which would
only operate on a closed proprietary system, which ultimately became known as
"Legacy Systems."
Management believes that there has been a trend away from purchasing all of
a company's hardware and software from one vendor. This trend was originally
started by the federal government as a means to ensure competitive pricing among
vendors, and is now being followed by most commercial/private sector entities.
Under this approach, bids are obtained from many suppliers, and one company
generally acts as the primary contractor.
Management believes that large hardware manufacturers, like IBM and DEC,
can no longer control the entire purchasing decision for large computer
enterprises without including an element of competitive price and offering
access to open architecture systems such as UNIX or NT. Further, end users have
realized that dependence on a single supplier is non-economic in terms of
performance increases at reasonable prices. In more recent years, the trend away
from a single vendor has been accelerated by technological advances which make
possible widely distributed client/server environments.
Mid-range computers are either older Legacy Systems or newer "Open Systems"
servers. Legacy Systems are almost always provided by a single vendor and
feature a proprietary operating system, while the newer, Open System servers are
supplied by numerous vendors and usually specify one of several different
versions of the UNIX operating system. One of the most popular legacy computers
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has been manufactured by DEC and is called the VAX hardware system. The VAX
proprietary operating system is called VMS. While many different hardware
manufacturers have licensed the right to resell the UNIX operating system from
AT&T, the major suppliers of hardware that feature UNIX as their operating
system are HP, SUN, SGI, IBM and DEC.
Management believes that within the computer user community Open Systems
are considered more desirable than proprietary systems such as VAX/VMS systems
for the following reasons: (i) UNIX systems offer significant upgraded power at
lower cost (price/performance) than older VAX/VMS systems; (ii) UNIX systems are
viewed as being "open" since they are compatible with a variety of hardware
types (interoperability); (iii) industry-wide standards allow UNIX supported
software applications to run unchanged across a wide variety of hardware
platforms; (iv) UNIX has become the new de-facto development environment for new
applications; and (v) significant savings can be realized from reduced
maintenance overhead.
As a result of these UNIX characteristics, VAX/VMS users requiring
increased performance from their older, existing proprietary system, may
consider the Company's conversion services to UNIX for: (i) preserving the
already sizable investment in existing VAX/VMS applications; (ii) a cost
effective approach to maintaining user productivity; (iii) avoiding expensive
user re-training on a new operating system; (iv) allowing competitive bidding of
hardware and software for best price and service from several vendors; and (v)
extending the usable life of older systems.
The Company believes that the primary deterrent to switching from a VAX/VMS
Legacy System to a newer UNIX system is the cost/risk of rewriting a critical,
dependable legacy application program to run in a new and different environment.
Uncertainty as to outcome, lack of available personnel to undertake the task and
the costly re-training process associated with learning a new operating system,
have contributed to users and information technology managers delaying the
decision to make the transition to faster, less expensive, Open Systems hardware
platforms. Adding to the crisis, in many cases, the original developers of the
code are no longer available for consultation as to design goals and/or
specifications. It therefore becomes necessary to evaluate, condense and convert
old code to new operating system environments. While most users, given the
option, would elect to re-host their familiar software application to the faster
environment of UNIX, the uncertainty of a conversion causes slow decision
making.
The Company has sought to address VAX/VMS users' conversion concerns by
offering a service called "Situational Analysis" that provides the user an
accurate assessment of code (line count, system calls, etc.) and gives the user
a rating of "Portability" as to the degree of difficulty in moving critical
legacy applications in advance of doing the conversion. This service assists
customers with the conversion decision, and allows the Company to become
sufficiently familiar with the customer's application to offer a fixed price bid
for the conversion.
In general, the limited functionality of many existing tools, together with
the inability of some organizations to fully utilize available technology, has
created increasing demand for integrated software development tools and
professional services to help organizations fully utilize available technology
and improve their own maintenance and redevelopment processes. The Company
believes that the developing client/server market will create additional demand
for software tools and professional services that enable organizations to reduce
the cost of maintenance and redevelopment of existing systems and redeploy these
resources for client/server implementation. In addition, management believes
that organizations will seek to reuse existing DEC VAX/VMS applications in
client/server environments to leverage their existing systems investment.
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In order to attain the advantages of open client/server environments while
preserving their investment in existing software applications, many VAX/VMS
users must undertake complex conversions to NT or UNIX operating systems. The
Company's consulting services and software conversion tools enable the Company's
clients to analyze and implement their UNIX conversions in a predictable and
cost-effective manner. The Company's clients include a number of Fortune 1000
companies and government agencies, including Electronic Data Systems Corp.
("EDS"), Proctor & Gamble, Kellogg Co., McDonnell Douglas Corp., Delta Air Lines
Corp., Daimler Benz AG, the United States Army and the United States Navy.
The Company is currently engaged in the development of additional software
tools which will complement its existing suite of conversion tools and services,
including the development of software tools that are to be used in converting
VAX/VMS Legacy Systems to NT, running on Intel-based and DEC Alpha-based
systems. Management expects to release a product for converting from VAX/VMS
systems to the NT system running on DEC Alpha servers by the end of 1997.
The Company was incorporated in 1982 under the laws of the State of
Colorado. The Company's executive offices are located at 303 East 17th Avenue,
Suite 108, Denver, Colorado 80203, and its telephone number is (303) 863-8088.
Market Opportunity
The Year 2000 Problem is expected to create widespread system failures due
to the use of computer programs that rely on two-digit date codes to perform
computations and other decision-making functions. The Company's suite of
software tools which address the Year 2000 Problem includes a "language
independent" scanner, a diagnostic utility which assesses the magnitude of the
exposure from two-digit date fields; an inventory report of the date problem;
specific language analyzers which parse code written in BASIC, FORTRAN, COBOL
and C languages, as well as utilities specific to DEC VAX/VMS environments such
as DCL, RMS, FMS AND SMG; a full repository enabling detailed planning project
scoping and a renovation module that guides the programmer through the fix
phase. The Company's NAVIG8-2000 tool set is the only multiple language software
available which is optimized for assessment, planning and remediation of the
Year 2000 Problem in DEC VAX/VMS systems.
Management of the Company intends to take advantage of the immediate market
need for Year 2000 compliance, and anticipates that the Company's primary focus
over the next few years will be its Year 2000 solutions. Management believes
that the Year 2000 Problem presents a substantial market opportunity for the
Company. In addition, it is anticipated that the Company's suite of Year 2000
Problem analysis and remediation tools and services will establish client
relationships for later DEC VAX/VMS migration services.
Based on published data from DEC and related industry analysts, the Company
estimates that there were in excess of 600,000 VAX/VMS systems installed at over
60,000 sites. Recent figures from DEC suggest that over 450,000 VAX/VMS systems
remain in operation today. Most computer manufacturers, employing the latest
advances in "reduced instruction set computing" ("RISC") chip technology are
selling UNIX Operating Systems. UNIX systems are less costly and provide greater
interoperability than DEC's VAX/VMS Legacy Systems. For this reason, UNIX
platforms are gaining substantial market share in DEC's traditional markets,
including the engineering and scientific industry segments. The Company's
software products are designed to meet the needs of those industry segments
wishing to convert their existing software and data from VAX/VMS systems to UNIX
systems. Computer industry analyst Dataquest estimates that by the year 2000, NT
will rival the UNIX operating system, with each owning approximately 40% of the
worldwide DEC operating system market. Other systems, including incumbent
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proprietary systems, will make up the remaining 20% market share. Management
expects that development of a conversion tool set that will provide for
conversion from VAX/VMS systems to the NT system running on DEC Alpha servers
will be completed by the Company by the end of 1997.
Additionally, many third-party software application solution providers,
driven by market demand to offer their solutions on UNIX operating systems, have
utilized the Company's tools to convert their old VAX/VMS software applications
to the UNIX environment.
The Company has targeted several segments of the engineering and commercial
sectors. These include aerospace, telecommunications, banking and financial
services, defense and government contractors, pharmaceutical firms, large
manufacturers, oil and gas producers and distribution and warehousing for
consumer goods. Major UNIX hardware vendors, including DEC, Hewlett Packard
("HP"), IBM, SUN Micro Systems ("SUN") and Silicon Graphics, Inc. ("SGI"),
include the Company's products in their materials for UNIX systems. DEC lists
the Company's products in its price book as well as in the General Services
Administration ("GSA") and Software Enterprise Workstation Program ("SEWP")
schedules.
In February 1992, DEC introduced a new generation of computers named Alpha.
Alpha runs DEC's proprietary operating system VMS as well as an industry version
of UNIX called DEC UNIX and Microsoft Corporation's Windows NT operating system.
While this system provides VMS on a RISC platform, many industry analysts
believe that current DEC customers will want to move to DEC UNIX or NT running
on Alpha. In order to preserve their VAX/VMS applications, these users will need
to convert VAX/VMS applications to either DEC UNIX or NT. DEC is not currently
providing products to convert from VAX/VMS systems to Alpha. Accordingly,
management believes that Alpha presents a significant market opportunity for the
Company.
Business Strategy
The Company's objective is to enhance its position as a leading provider of
integrated solutions which will solve the Year 2000 Problem and meet the
conversion needs of VAX/VMS users. Key elements of the Company's strategy
include:
Near-term Focus on the Year 2000 Market. The Company intends to continue
focusing on its suite of Year 2000 Problem analysis and remediation tools and
services to take advantage of the immediate market need for compliance
requirements and to establish client relationships for later DEC VMS migration
services.
Commercialization of the Company's Windows NT conversion tool set . The
Company intends to complete development of and to market software tools which
will allow existing and new customers to migrate existing code into the NT
operating environment.
Continue Emphasis on Consulting Services and Establishment of Year 2000 and
UNIX/NT Conversion Teams. The Company intends to continue to emphasize the sale
of its integrated consulting services in conjunction with its suite of software
tools. The Company has established five three-man conversion teams, comprised of
software engineers, to perform UNIX and NT conversion projects, and intends to
establish additional such teams to perform its Year 2000 Problem and
conversion/migration projects. The conversion teams allow the Company to
effectively staff projects as the Company achieves its anticipated growth (of
which there can be no assurance).
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Develop New Products and Services. The Company intends to continue to
develop software tools and consulting services which address the needs and
problems encountered in conversion of VAX/VMS Legacy Systems as well as other
information technology environments. Management believes that the successful
development of complementary products and services will allow the Company to
leverage its products and services into new and significantly larger markets.
Outsourcing. The Company intends to position its software so that it may be
licensed by large outsourcing providers such as EDS, Lockheed Martin Corp., ISSC
and others, thereby increasing its license fees and consulting service fees.
Outsourcing offers organizations a complete information technology system on a
contract basis. Many larger corporations have undertaken this approach in order
to reduce personnel costs and operating overhead. The outsourcing provider is
generally able to provide the services on a more cost effective basis because of
economies of scale and volume purchases that are not available to the typical
user. The Company assists the outsourcing provider (EDS and others) in obtaining
such cost savings by providing a quick and efficient assessment of the presence
of proprietary systems, and the opportunity for efficient conversion from those
systems.The Company can enable the rapid transition to Open Systems thereby
reducing hardware and software maintenance costs for the outsourcing provider.
Expand International Marketing Activities. In fiscal 1995, 1996 and 1997,
revenues derived from international clients totaled approximately $96,547,
$318,393 and $539,635, respectively. The Company's international clients have
included Daimler Benz, Renault V.I. and Alcatel. The Company will continue to
expand its international marketing activities to increase its market penetration
in Europe and Asia.
Secure Additional Consulting Projects. In the course of performing UNIX
conversion services, the Company's software engineers and technical support
staff establish close relationships with the information technology personnel of
client organizations. Through these relationships, the Company will attempt to
secure additional consulting projects which are within the expertise of the
Company's staff. Such projects may, but need not, be related to the client's
UNIX conversion needs. The Company believes that this strategy will enhance
client relationships while generating profitable consulting fees.
Target Large Corporations and Government Agencies. The Company believes
that there are in excess of 450,000 VAX/VMS systems currently in operation.
These systems are generally operated by large corporations and government
agencies. The Company will continue to identify and direct its marketing efforts
to organizations which have extensive information technology environments
supported by substantial budgets.
Investment in or Acquisition of Complementary Businesses, Technologies or
Product Lines. The Company intends to evaluate opportunities for growth or
expansion of its business through investment in or acquisition of complementary
businesses, technologies or product lines. Management believes that
opportunities to expand will be available to the Company and intends to
investigate opportunities that are consistent with the Company's core business
and its expertise. As of the date of this Report, no target businesses,
technologies or product lines have been identified.
Services and Products
Services.
The Company historically focused its marketing and sales efforts on selling
its various software conversion tools on a "stand-alone" basis. Since fiscal
1995, the Company has focused its efforts on selling an integrated package
consisting of both software tools and the consulting services of its highly
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trained and experienced personnel. Management believes that this change in
strategy better addressed clients needs for conversion services. Management
believes that the dramatic increase in revenues in fiscal 1995, 1996 and 1997,
as compared to fiscal 1994, is directly attributable to this change in strategy
and the Company intends to continue this strategy in the future.
The Company now offers a full spectrum of services that are carried out by
the Company's personnel, who are experts in both the VAX/VMS and UNIX
environments. The Company's personnel use the Company's tools that automatically
identify and diagnose difficult areas in porting an application. This enables
them to implement conversion techniques that ensure successful conversions and
porting. The Company offers the following services:
1) Year 2000 Impact Analysis Services: The Company offers a combination of
automation tools and engineering services designed to assist in
identifying, documenting and quantifying Year 2000 date remediation
requirements. Using the NAVIG8-2000 tool, Company engineers provide DEC VAX
or Alpha users and UNIX users an automated and comprehensive means of
scanning, parsing and documenting millennium date change requirements.
These services are designed to document the conversion requirements, costs
and levels of effort that will be required to address millennium date
changes.
2) Situational Analysis: The Company's personnel use automated tools and their
expertise to scan the customer's code while on-site at the customer's
facility. Within four weeks, a written report is provided to the customer
identifying the porting issues and their solution options. The code is
rated on a scale of one to five as to its Portability. If requested by the
customer, a bid to conduct the conversion on a fixed-price basis is also
provided.
3) Implementation Planning: The Company's analysts work with the customer to
select the appropriate solutions for their conversion issues. These answers
are assembled into a project plan that is used by the project manager to
control and synchronize the conversion effort as well as measure progress.
4) Application Port: The Company's analysts perform the code conversion. Where
suitable, the Company performs automatic conversion using the Company's
tools, as well as engineering of modules which must be redesigned to work
on UNIX. This is followed by complete testing and certification. The
Company's service can be contracted as a turnkey port or as part of a
cooperative team effort with the customer's personnel.
5) Implementation Assistance: In addition to industry standard support and
update contracts, the Company offers both on-site and off-site porting
assistance agreements. A foreign customer may contract for off-site
telephone support.
6) Custom Programming: Programming is done on either a fixed price or time and
materials basis for the purpose of re-engineering and modernizing old
Legacy Code or for porting custom applications that run in front of or
after COTS applications.
7) Training: Including VMS Users Introduction to UNIX, Application Conversion
using Tools and existing systems investments.
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8) Code Audit Measurement and Analysis: The Company measures adherence to
external and internal coding standards as a means to prevent significant
deviation from standard coding practices.
The Company provides its services to each client over any of the following
three methods, designed to meet the specific project requirements of the
customer.
On-site Services. Inventory, analysis, repository and remediation services
are performed by Company technicians at the client's facilities.
Factory Services. High volumes of code can be processed by Company
technicians at the Company's facilities in Denver, Colorado.
Corporate Licenses. In the case of large organizations that have decided to
complete a portion of the work internally, a corporate license may be
purchased. Pricing is determined after an assessment of the amount of code
that will be processed over the course of the conversion. Management
expects this segment to grow significantly as the amount of internal
conversion work increases.
Products.
Year 2000 Tools. The Company provides assessment and remediation solutions
which satisfy its clients' needs for Year 2000 compliance through the use of its
proprietary tool set. Its software tools are either licensed directly to the
client, are licensed to third party information technology service providers
contracted to service the end-user or are used directly by the Company through
service contracts with the customer.
Based on language parsers and compiler technology, the Company's
NAVIG8-2000 tool set uses heuristic methods to identify variables in code that
are most likely to hold date information. The scanner diagnostic software
utility is designed to uncover obvious date usages found through a textual
search, assessing the magnitude of exposure from two-digit year fields.
Language-specific parsers break the program down into its smallest syntactical
units and then a name recognition and reporting program generates a report
detailing the usage of date variables. An external table defines the patterns of
variable names which potentially contain date information; pattern matching
using this table provides the first level of date variable identification. The
tool set further tracks date information across subroutines and function
invocations, finding variables not implicated by name but which are potentially
receiving date information. Following remediation, the tool set provides for the
creation of the quality assurance model for the enforcement of external and
internal standards. NAVIG8-2000 can be used on one program at a time or can be
configured to scan multiple programs or several directories.
NAVIG8-2000 is a tool set that provides users of DEC VAX and Alpha/VMS,
Windows NT and UNIX systems an automated and comprehensive means of quickly
scanning and accurately identifying millennium date change requirements. It
locates computational date occurrences and filters the findings, making review
and remediation more manageable. The NAVIG8-2000 tool set includes a combined
set of seven functional elements as described below.
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Tier I: Inventory - locate and validate all software modules and metrics (language, lines of code, etc.)
Tier II: Scanner - language independent, conducts rules filtering by lexical name and pattern matching
Tier III: Analyzer - language specific, performs an iterative refinement and recognizes dependencies;
available in BASIC, C, COBOL, FORTRAN, UNIX C and UNIX FORTRAN, VB and utilities
DCL, RMS, FMS and SMG
Tier IV: Repository/Planning - documents entities and relationships and identifies sub-system dependencies
Tier V: Remediation - data file translation and date routines fix
Tier VI: Testing - performs system run scenarios to assess conversion quality
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The Company's NAVIG8-2000 product has additional, ancillary capabilities
which provide extended functionality to the DEC VMS community, including: (i)
code auditing, which after the remediation of a legacy system, offers a means of
maintaining the integrity of internal and external development standards of an
application environment through future code additions and changes; (ii) a search
engine, which can be used against source code written in nearly all major
software languages to search for any variable; and (iii) date field expansion,
which expands the date field space in source code as a solution to Year 2000
requirements.
NAVIG8-2000 UNIX is a robust assessment tool that rapidly determines the
magnitude of Year 2000 issues in UNIX applications. Language independent and
driven by a powerful inventory module, the tool generates extensive software
metrics for streamlined evaluation and efficient planning for Year 2000
compliance.
DEC Legacy System Conversion. The Company's conversion products are part of
a sophisticated tool set that assists in the following tasks: (i) comprehensive
analysis of Legacy Code to determine Portability to Open Systems; (ii) thorough
analysis and planning for conversion; (iii) performance of actual conversion, if
required by the customer; (iv) creation of quality assurance models for the
enforcement of external and internal standards applicable to new target
environments; and (v) planning and implementation for modernization and
re-engineering databases and user interfaces.
The Company has developed a unique analyzer tool called Open NAVIG8, that
quickly and accurately examines large quantities of Legacy Code, eventually
organizing and prioritizing the individual modules that need to be moved. This
porting process is then performed using the actual porting tools that automate
up to 95% of the conversions.
The Company's conversion process relies on Company owned and developed
tools to provide a level of "transparency" to both VAX/VMS and UNIX users, thus
preserving user productivity while accessing the higher power/lower cost of
UNIX. Additionally, the conversion tools support users as they learn UNIX at
their own pace and enable large batch jobs to be moved to the new, faster UNIX
platform, thereby freeing up the VAX to perform other tasks more efficiently.
Other Company software features include the ability to share information
between UNIX and VAX/VMS systems and to transfer files and records over a
network. The Company's conversion offerings are available on a wide range of
UNIX systems, including SGI, HP, Sun, DEC and IBM. Features are discussed in
greater detail below as each of the Company's products and services is
individually described.
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While Open NAVIG8 tools introduce the client to the Company's competencies,
the rendering of conversion services is the core business that generates
revenues. The Company believes that clients experience greater value from the
modernization and re-engineering process if their personnel are involved in
understanding what has been done to change the computer environment. Therefore,
various phases of the conversion process are deployed at the customer site with
client personnel as observers. Additionally, the Company conducts training
classes for the client end user groups in the operation of the new environment.
Ongoing training and software updates are a component of gross revenue in each
services contract.
After delivery of a new environment, the Company will offer a service that
measures, on a regular interval, the adherence to either external or internal
coding standards. This "code auditor" service has been driven by the United
States Defense Department objective of prevention of future Legacy Code chaos.
The Company believes that private industry will also move to this objective.
The Company's conversion products-Open NAVIG8, Open LIBR8 and Open
ACCLIM8-embody the Company's core technological advantages and competencies;
however, the following groups of tools are integral to all conversion projects.
User Productivity
Tools ............ are designed to provide the user with familiar screen
formats and command scripts thereby preserving productivity
while learning a new operating system (UNIX/NT). The
Company's User Productivity Tools include:
Open DCL ..... VMS command line interface (recall/editing); login shell
nu TPU ....... VAX-style editor for UNIX (TPU, EDT, WPS modes)
Open SUBMIT .. VAX to UNIX batch submission utility
-----------------------------------
Porting Tools ... are designed to move and support old Legacy Code
applications in UNIX or NT environments, providing the same
original functionality on the new target platform. The
Company's Porting Tools include:
Open COBOL ... VAX COBOL source code converter and linker
Open ACCLIM8 . Pre-compiler for VAX FORTRAN; indexed file support
Open BASIC ... Re-targetable BASIC to C Compiler; VAX BASIC compatibility
Open PASCAL .. VAX Pascal to C Translator
C/Fix ........ Translator for VMS specific C constructs (sold with LIBR8)
Ada Bindings . Source code interface routines for all Ada Compilers
and LIBR8
Open LIBR8 ... VMS runtime library support (ast, qio, event flags,
mailboxes, etc.)
Open RMS ..... UNIX equivalent of VMS I/O calls. (sold with LIBR8)
Open SMG ..... VAX compatible Screen Management facility for Open Systems
FMS/UNIX ..... FMS for UNIX; FMS Editor (100% compatibility) sold
separately
Open DCL ..... Command language interpreter; VMS-style error handling
-10-
<PAGE>
Analysis &
Programming
Standards Tools . are designed to provide analysis and code auditing standards
and capabilities in a work bench environment, Legacy Code is
easily examined and reconstructed to meet any user stated
rules. The Company's Analysis & Programming Standards Tools
include:
Open NAVIG8 ... Analyzer - Documents conversion barriers
Auditor - Guidance and standards for portability
2000 - Year 2000 impact analysis for VMS and UNIX users.
New Product Offerings
In addition to VAX/VMS to UNIX conversions, the Company believes that there
is a large opportunity in both the government and commercial sector to provide
conversion services/tools for VAX/VMS to NT conversions running on Alpha
servers.
Microsoft Corporation's Windows NT operating system is the newest operating
system from Microsoft Corporation. DEC has announced a strategic partnership
with Microsoft to offer its VAX minicomputer customers a seamless environment
where Open VMS, DEC UNIX and NT will be supported on DEC's Alpha platform.
Management believes that DEC has no plans to assist users of its older VAX
minicomputers in moving their VAX applications to the new NT operating
environment. The Company plans to port all of its UNIX conversion tools to the
NT environment, thus enabling VAX/VMS users to operate their existing VAX
applications on an NT operating system. The Company is developing the software
tools for the NT conversion opportunity, and management expects that this
product will be available by the end of calendar year 1997.
Customers
The Company's software tools have been sold to over 800 customers,
including installation in over 100 US Department of Defense sites. The Company's
customers are principally users of VAX/VMS Legacy Systems that are either
commercial enterprises or government or quasi-government agencies. During fiscal
1997, one customer accounted for approximately 13% of the Company's revenues.
Set forth below is a partial list of the Company's customers.
<TABLE>
<CAPTION>
US Commercial Clients International Commercial Clients US Gov't. Clients
- --------------------- -------------------------------- -----------------
<S> <C> <C>
BDM International Alcatel Alsthom Cie Generale Europe Commerce Dept.
Chrysler Corp. Daimler Benz AG EPA
Delta Air Lines Inc. Ericson NASA
Electronic Data Systems Corp. Renault V.I. NSA
General Instrument Corp. US Air Force
Kellogg Co. US Army
Kroger Co. US Navy
Lockheed Martin Corp.
McDonnell Douglas Corp.
Proctor and Gamble
TRW
Union Carbide Corp.
</TABLE>
-11-
<PAGE>
Union Carbide Corp., BDM International, General Instrument Corp. and TRW
have embedded the Company's software in their UNIX solutions, yielding the
potential for substantial run-time license fees for the Company.
In the second half of 1996, the Company commenced releasing its
"NAVIG8-2000" services which address the Year 2000 Problem. To date, customers
of the Company's Year 2000 products and services include AMC Theaters, The City
of Fort Collins, Colorado, Eli Lilly, RJR Reynolds Company, Societe Generale and
Washington Dental.
Marketing and Distribution
The Company utilizes several marketing approaches including direct mail
advertising, advertising in trade publications, press releases, trade shows,
Company sponsored seminars, speaking engagements and independent software vendor
catalog listings. The Company's sales personnel contact the leads generated by
these activities. The Company's services and products are electronically
advertised on the Company's web page at www.accelr8.com, a cost effective and
efficient method of reaching the Company's target market. The Company will
continue to emphasize attendance at trade shows, Company and vendor sponsored
seminars, press releases, speaking engagements and independent software vendor
catalog listings in its marketing efforts. The Company's international sales
represented 22% of the Company's total revenues in fiscal 1997, as compared to
15% of 1996 and 7% of fiscal 1995 revenues. Management intends to direct a
significant portion of its marketing efforts toward further market penetration
in international markets, with its primary emphasis upon Europe and Asia.
The Company's on-site personnel often have the opportunity to market
additional Company services to existing customers. The Company's conversion
teams have and will continue to focus upon educating customers as to the full
range of the Company's products and services, and to providing solutions to the
customers' problems.
The Company also attends hardware vendor sales events, such as those
sponsored by HP and DEC, for industry group segments, including TELCOS
(telecommunication companies), government entities and pharmaceutical companies.
Company representatives follow-up on contacts made at these events and, where
appropriate, schedule on-site visits with potential customers. While on-site
with customers and potential customers Accelr8's representatives work closely
with technical personnel in Denver for instant and direct help in addressing the
customers' problems and needs. Management believes that this coordinated
approach between the field sales persons and the technical personnel in Denver
has led to greater sales, and the Company intends to continue this practice.
Research and Development
The Company conducts its research and development at its headquarters in
Denver, Colorado. The Company believes that the continued development of new
products and enhancement of existing products is essential to maintaining a
competitive position in the marketplace. The Company expended $61,324 on Company
sponsored research and development during fiscal 1997, and $33,038 during fiscal
1996. Technical personnel normally involved in research and development also
provide a substantial amount of technical assistance in connection with the
Company's consulting services, so that the actual amount classified as research
and development is less than would be the case if such expenses were not
allocable to specific contracts. Management is committed to a strong research
and development program, and intends to continue these expenditures at levels
necessary to allow the Company to maintain a strong competitive position.
-12-
<PAGE>
Production
The Company's production facilities are located at its headquarters in
Denver, Colorado, and are primarily used for software development and extensive
testing and quality control of software products. The Company is currently
negotiating for expansion of its facilities and anticipates hiring additional
technical, marketing, sales and managerial personnel.
The Company does not believe that, for the foreseeable future, the
Company's products will be subject to any significant fluctuations in supply
costs. Componentry and systems used to develop products and the actual tape
cassettes on which software is placed can be obtained from a variety of vendors,
none of which holds a controlling position within the market. The Company
believes that it has the ability to fill any anticipated future sales orders
received.
Competition
Digital Equipment Corporation recently signed a marketing agreement with
PierCom, of Ireland, to address Year 2000 issues for the DEC COBOL language.
Management believes that the largest segment of the DEC VAX/VMS installed base
requires a Year 2000 solution for the DEC FORTRAN language. Management does not
believe that Digital Equipment currently has a software tool commercially
available to provide Year 2000 services for DEC FORTRAN, DEC BASIC, DEC C and
the utilities RMS, FMS and DCL.
Management is aware of two companies that compete directly with the Company
with respect to its conversion/migration products. BBC of Boston, Massachusetts,
has a product available that directly competes with the Company's Open DCL
product. Sector 7, formerly known as Software Translations, of Austin, Texas,
offers a software conversion service for moving from VMS to UNIX and NT.
Management believes that the Company offers a broader range of products and
services than either of these competitors, and is therefore able to compete
successfully against them. Although DEC does not offer its own products for
conversion from its VAX/VMS Legacy Systems to UNIX, should DEC choose to do so,
the Company could be materially and adversely affected.
Intellectual Property
The Company relies on a combination of copyright, trademark and trade
secret laws, employee and third party disclosure agreements, license agreements
and other intellectual property protection methods to protect its proprietary
rights. The Company protects the source code version of its products as a trade
secret and as an unpublished copyrighted work. The Company's proprietary
software products are generally licensed to customers on a "right to use" basis
pursuant to a perpetual, nontransferable license that generally restricts use to
the customer's internal purposes and to a specific computer platform that has
been assigned a "key code." However, it may be possible for unauthorized parties
to copy or reverse engineer certain portions of the Company's products or obtain
and use information the Company regards as proprietary. The Company currently
has no patents and existing copyright and trade secret laws offer only limited
protection. Further, the laws of some foreign countries do not protect the
Company's proprietary rights to the same extent as do the laws of the United
States. The Company has been and may be required from time to time to enter into
source code escrow agreements with certain customers, providing for release of
source code in the event the Company files bankruptcy or ceases to continue
doing business. Although the Company's competitive position may be adversely
affected by unauthorized use of its proprietary information, management believes
that the ability to fully protect its intellectual property is less significant
to the Company's success than are other factors, such as the knowledge, ability
-13-
<PAGE>
and experience of its employees and its ongoing product development and customer
support activities. There can be no assurance that the protections in place by
the Company will be adequate.
There can be no assurance that third parties will not assert infringement
or other claims against the Company with respect to any existing or future
products, or that licenses would be available if any Company technology were
successfully challenged by a third party, or if it became desirable to use any
third-party technology to enhance the Company's products. Litigation to protect
the Company's proprietary information or to determine the validity of any
third-party claims could result in significant expense to the Company and divert
the efforts of the Company's technical and management personnel, whether or not
such litigation is determined in favor of the Company.
While the Company has no knowledge that it is infringing upon the
proprietary rights of any third party, there can be no assurance that such
claims will not be asserted in the future with respect to existing or future
products. Any such assertion by a third party could require the Company to pay
royalties, to participate in costly litigation and defend licensees in any such
suit pursuant to indemnification agreements, or to refrain from selling an
alleged infringing product or service.
Employees
The Company has 30 employees at its facilities in Denver, Colorado,
including eight employees in sales and marketing and administrative positions
with the balance in engineering and development. The Company anticipates hiring
up to 30 additional employees to staff its Year 2000 teams and for additional
sales and marketing. There are no collective bargaining agreements, and the
Company considers its relations with its employees to be good.
Factors That May Affect Future Results
Dependence on Key Employees. The Company's success depends to a significant
extent upon a number of key management and technical personnel, the loss of one
or more of whom could have a material adverse effect on the Company's results of
operations. The Company carries key man life insurance in the amount of $5
million on Thomas V. Geimer, as well as life insurance on seven of its key
employees, including Thomas V. Geimer, Harry J. Fleury, Franz Huber and Timothy
Fitzpatrick, in the amount of $250,000 for each individual. The Board of
Directors has adopted resolutions under which one-half of the proceeds of any
such insurance will be dedicated to a beneficiary designated by the insured.
There can be no assurance that the proceeds from such life insurance policies
would be sufficient to compensate the Company for the loss of any of these
employees, and these policies do not provide any benefits to the Company if
these employees become disabled or are otherwise unable to render services to
the Company. Further, the Company does not currently have employment agreements
with any of its officers or key employees, and does not currently intend to have
such employment agreements in the future. The Company believes that its
continued success will depend in large part upon its ability to attract and
retain highly skilled technical, managerial, sales and marketing personnel.
There can be no assurance that the Company will be successful in attracting and
retaining the personnel it requires to develop and market new and enhanced
products and to conduct its operations successfully.
Management of Growth. The Company's rapid growth in business in recent
quarters has placed and may continue to place a significant strain on the
Company, particularly on its customer services organization. Any failure by the
Company to respond quickly to the service needs of its customers could cause the
loss of customers and have a material adverse effect on the Company's results of
operations. The Company's future operating results will depend on its ability to
expand its services organization and infrastructure commensurate with its
expanding base of customers and on its ability to attract, hire and retain
skilled employees. There can be no assurance that the Company will be able to
effectively manage any future growth.
-14-
<PAGE>
Dependence on Year 2000 Market and Conversion of DEC VAX/VMS Legacy
Systems. The growth in the Company's professional services fees in fiscal 1997
resulted primarily from demand for its Year 2000 Problem services as awareness
of the Year 2000 Problem has grown. In addition, this demand has also accounted
for a significant portion of software license revenue for the same period as
customers have acquired the Company's software products to help address their
Year 2000 concerns. Should the demand for the Company's Year 2000 solutions and
products decline significantly as a result of new technologies, competition or
other factors, the Company's professional service fees and license revenues
would be materially and adversely affected. The Company anticipates the Year
2000 market will decline, perhaps rapidly, following the year 2000. It is the
Company's strategy to leverage customer relationships and knowledge of customer
application systems derived from its Year 2000 solutions to market other
products and services beyond the Year 2000 market. However, there can be no
assurance that this strategy will be successful, and should the Company be
unable to market other products and services as demand in the Year 2000 market
declines, whether as a result of technological change, competition or other
factors, the Company's business, results of operations and financial condition
will be materially and adversely affected.
The Company's only other software products and services are designed for
conversion from VAX/VMS Legacy Systems to UNIX and NT open client/server
environments. Future revenues from this line of business are dependent on upon
users of VAX/VMS Legacy Systems electing to convert their data and applications
to UNIX and NT environments. To the extent that users of VAX/VMS Legacy Systems
elect to abandon their VAX/VMS applications and data and to re-write their
information technology systems entirely in UNIX or NT environments without
conversion, the Company's revenues and future prospects could be materially and
adversely affected.
Concentration of Revenues. A significant portion of the Company's revenues
have been derived from substantial orders placed by a small number of customers.
As a result, the Company's revenues have been concentrated among a relatively
small number of customers. In fiscal 1997, one customer accounted for 13% of the
Company's revenues, and in fiscal 1996 revenues from the Company's three largest
customers amounted to 42% of the Company's total revenues. The Company expects
that it will continue to be dependent upon a limited number of customers for
significant portions of its revenues in future periods. Generally, the Company
is hired for a specific project that will be completed within a fixed period of
time. Once a project has been completed, customers generally will not require
significant services in the future. However, during particular periods, certain
customers may be significant. There can be no assurance that revenues from
customers that accounted for significant revenues in past periods, individually
or as a group, will continue or, if continued, will reach or exceed historical
levels in any future period. The Company's operating results may in the future
be subject to substantial period-to-period fluctuations as a consequence of such
customer concentration.
Ability to Respond to Technological Change. The Company's future success
will depend significantly on its ability to enhance its current products and
develop or acquire and market new products which keep pace with technological
developments and evolving industry standards as well as respond to changes in
customer needs. There can be no assurance that the Company will be successful in
developing or acquiring product enhancements or new products to address changing
technologies and customer requirements adequately, that it can introduce such
products on a timely basis or that any such products or enhancements will be
successful in the marketplace. The Company's delay or failure to develop or
acquire technological improvements or to adapt its products to technological
change would have a material adverse effect on the Company's business, results
of operations and financial condition.
-15-
<PAGE>
Dependence Upon Proprietary Technology; Intellectual Property Rights. The
Company relies primarily on a combination of copyright, trademark and trade
secret laws, employee and third party disclosure agreements, license agreements
and other intellectual property protection methods to protect its proprietary
rights. The Company's proprietary software products are generally licensed to
customers on a "right to use" basis pursuant to a perpetual, nontransferable
license that generally restricts use to the customer's internal purposes and to
a specific computer platform that has been assigned a "key code." However, it
may be possible for unauthorized third parties to copy or reverse engineer
certain portions of the Company's products or obtain and use information the
Company regards as proprietary. The Company currently has no patents and
existing trade secret and copyright laws provide only limited protection. The
Company's competitive position and operations may be adversely affected by
unauthorized use of its proprietary information, and there can be no assurance
that the protections put in place by the Company will be adequate.
There can be no assurance that third parties will not assert infringement
or other claims against the Company with respect to any existing or future
products, or that licenses would be available if any Company technology were
successfully challenged by a third party, or if it became desirable to use any
third-party technology to enhance the Company's products. Litigation to protect
the Company's proprietary information or to determine the validity of any
third-party claims could result in significant expense to the Company and divert
the efforts of the Company's technical and management personnel, whether or not
such litigation is determined in favor of the Company.
Competition. The market for the Company's products and services is
competitive and subject to rapid change. There can be no assurance that
competitors will not develop products or alternative technologies that: (i) are
superior to the Company's products; (ii) achieve greater market acceptance; or
(iii) make the Company's products obsolete. Further, there can be no assurance
that the Company will be able to compete successfully with its present or
potential competition, or that competition will not have a material adverse
effect on the Company's results of operations and financial condition.
Possible Volatility of Stock Price; Dividend Policy. The market price of
the Company's Common Stock could be subject to significant fluctuations in
response to variations in actual and anticipated quarterly operating results,
changes in earnings estimates by analysts, announcements of new products or
technological innovations by the Company or its competitors, and other events or
factors. In addition, the stocks of many technology companies have experienced
extreme price and volume fluctuations that have often been unrelated to the
companies' operating performance. The Company does not intend to pay any cash
dividends on its Common Stock in the foreseeable future.
Control by Management. The officers, directors and key employees of the
Company own approximately 21.7% of the outstanding shares of Common Stock and,
if they exercise all of the options and warrants that they currently hold, they
will own approximately 43.9% of the Company's outstanding shares of Common
Stock. Due to their stock ownership, the officers, directors and key employees
may be in a position to elect the Board of Directors and, therefore, to control
the business and affairs of the Company, including certain significant corporate
actions such as acquisitions, the sale or purchase of assets and the issuance
and sale of the Company's securities.
-16-
<PAGE>
Shares Eligible for Future Sale. As of July 31, 1997, the Company had
reserved 1,335,000 shares of Common Stock for issuance upon exercise of options
which have been or may be granted pursuant to its stock option plans, of which
options to purchase 385,000 shares were outstanding as of July 31, 1997 ("Plan
Options"). Warrants and options to purchase an additional 1,140,000 shares also
were outstanding at July 31, 1997 ("Geimer Warrants"), as were warrants to
purchase 34,500 shares which were issued to the underwriter of a prior public
offering of the Company's securities ("Underwriter's Warrants"). An aggregate of
335,000 of the Plan Options are exercisable at $0.36 per share, and the
remaining 50,000 Plan Options which are currently outstanding are exercisable at
$7.25 per share. The Geimer Warrants were exercisable at $0.24 per share, and
were recently exercised and contributed to a Rabbi Trust. Under the terms of the
Rabbi Trust the shares will be held in the trust, and carried as treasury stock
by the Company. The Rabbi Trust provides that upon Mr. Geimer's death,
disability, or termination of his employment the shares will be released ratably
over the subsequent ten (10) years, unless the Board of Directors determines
otherwise. See Note 8 to the Financial Statement for further information. The
Underwriter's Warrants are exercisable at $8.40 per share. Sales of Common Stock
underlying Plan Options or Underwriter's Warrants may adversely affect the price
of the Common Stock.
Important Factors related to Forward-Looking Statements and Associated
Risks. This Report contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, and the Company intends that such
forward-looking statements be subject to the safe harbors created thereby. These
forward-looking statements include the plans and objectives of management for
future operations, including plans and objectives relating to the products and
future economic performance of the Company. The forward-looking statements
included herein are based on current expectations that involve a number of risks
and uncertainties. These forward-looking statements are based on assumptions
that the Company will continue to provide services and develop, market and ship
products on a timely basis, that competitive conditions within the software
industry will not change materially or adversely, that demand for the Company's
products and services will remain strong, that the Company will retain existing
independent sales representatives and key management personnel, that the
Company's forecasts will accurately anticipate market demand and that there will
be no material adverse change in the Company's operations or business.
Assumptions relating to the foregoing involve judgments with respect to, among
other things, future economic, competitive and market conditions and future
business decisions, all of which are difficult or impossible to predict
accurately and many of which are beyond the control of the Company. Although the
Company believes that the assumptions underlying the forward-looking statements
are reasonable, any of the assumptions could prove inaccurate and, therefore,
there can be no assurance that the results contemplated in forward-looking
information will be realized. In addition, as disclosed elsewhere under other
risk factors, the business and operation of the Company are subject to
substantial risks which increase the uncertainty inherent in such
forward-looking statements. In light of the significant uncertainties inherent
in the forward-looking information included herein, the inclusion of such
information should not be regarded as a representation by the Company or any
other person that the objectives or plans of the Company will be achieved.
-17-
<PAGE>
GLOSSARY OF TERMS
Client/Server The model of interaction in distributed data processing in
which a program at one site sends a request to a program at
another site and awaits a response. The requesting program
is called a client, and the answering program is called a
server.
COTS Acronym for "Commercial Off The Shelf" which means hardware
and/or software that is readily available for purchase.
Compiler
A program that converts another program from some source
language (or programming language) to machine language
(object code).
DEC Acronym for "Digital Equipment Corporation."
Interoperability The ability of software and hardware, on multiple machines,
from multiple vendors to communicate.
Legacy Code Existing software, including proprietary applications,
out-dated commercial vendor applications, data bases and
element relationships, that have been in use for an extended
period of time, thus accumulating the "legacy" of corporate
memory, files and information system functionality that may
no longer adequately satisfy the owner.
Legacy System Existing hardware and network systems, especially
proprietary, closed mainframe environments or out-dated
architectures that have been in use for an extended period
of time, typically with limited functionality and limited or
no compatibility with more modern systems. DEC's VMS
operating system is an example of a Legacy System.
Network Hardware and software data communication systems.
NT Refers to the Windows NT operating system which is the
latest open system architecture for Windows developed by
Microsoft Corporation.
Open Systems Computer and communications environments based on formal and
de facto interface standards. Such interfaces should not be
controlled by a single vendor and must be freely available.
Systems built using these standard interfaces provide
portability of software across standard computer platforms,
Interoperability between systems and much greater choice and
flexibility in systems procurement.
Operating System The software which schedules tasks, allocates storage,
handles the interface to hardware and presents a default
interface to the user when no application program is
running.
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<PAGE>
Portability The ease with which a software application can be made to
run in a new environment.
Porting The process or ability to electronically "port" or move
data, files and software from one computer or Network
environment to another computer or Network environment.
Proprietary A product not conforming to open system standards, that was
typically developed by a particular hardware manufacturer
for its own computers.
Re-engineering The examination and modification of a system to reconstitute
it in a new form and the subsequent implementation of the
new form.
RISC Acronym for reduced instruction set computing.
UNIX A widely used multi-user, general purpose operating system.
A trademark of X/Open Company Limited, for an operating
system originally developed at the Bell Laboratories of AT&T
in the late 1960's and early 1970's and subsequently
enhanced by the University of California at Berkeley, AT&T,
the Open Software Foundation (OSF) and others.
VAX Virtual Address eXtension. Digital Equipment Corporation's
proprietary 32-bit minicomputer, considered one of the most
successful designs in industry history.
VAX/VMS As used in this Prospectus shall refer to DEC's VAX
minicomputers, which utilize DEC's VMS operating system.
VMS The brand name of the proprietary multi-user, multi-tasking,
virtual memory operating system provided by DEC with its VAX
minicomputers.
Workstation A general purpose computer designed to be used by one person
at a time and which offers higher performance than normally
found in a personal computer, especially with respect to
graphics, processing power and the ability to carry out
several tasks at the same time.
Year 2000 Problem The Year 2000 Problem arises from the widespread use of
computer programs that rely on two-digit date codes to
perform computations and decision making functions. Many of
these computer programs may fail due to an inability to
properly interpret date codes. For example, such programs
may misinterpret "00" as the year 1900 rather than 2000.
Item 2 - Description of Property
- --------------------------------
The Company currently leases approximately 6,196 square feet of office and
research facility space at 303 E. 17th Avenue, Suite 108, Denver, Colorado
80203, at a monthly rental of approximately $4,900. The lease expires on
December 31, 1999. Additional space will be needed to provide office space for
the additional technical and sales personnel that the Company anticipates hiring
throughout 1997. Although the Company's existing facility is adequate for the
present number of employees, management of the Company is currently negotiating
to add an additional 7,300 square feet of space which is expected to be adequate
to accommodate the Company's projected increase in personnel.
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<PAGE>
Item 3 - Legal Proceedings
- --------------------------
The Company is not a party to any legal proceedings, nor does management
believe that any such proceedings are contemplated.
Item 4 - Submission of Matters To a Vote of Security Holders
- ------------------------------------------------------------
No matters were submitted by the Company to a vote of the Company's
shareholders through the solicitation of proxies or otherwise, during the fourth
quarter of the fiscal year covered by this report.
PART II
-------
Item 5 - Market For Common Equity and Related Stockholder Matters
- -----------------------------------------------------------------
Since November 19, 1996, the Company's Common Stock has traded on the
Nasdaq National Market under the symbol "ACLY." Prior to that date, the Common
Stock was traded in the over-the-counter market on the Nasdaq Electronic
Bulletin Board.
The table set forth below presents the range, on a quarterly basis, of high
and low bid prices per share of Common Stock as reported by the National
Quotation Bureau, Inc. The quotations represent prices between dealers and do
not include retail markup, markdown or commissions and may not necessarily
represent actual transactions. The prices for the quarters ended after October
31, 1996 present high and low sale prices as reported by Nasdaq.
Quarter Ended High Low
------------- ---- ---
Fiscal 1996
October 31, 1995(1) .56 .48
January 31, 1996(1) .64 .44
April 30, 1996(1) 1.50 .80
July 31, 1996(1) 4.00 1.40
Fiscal 1997
October 31, 1996(1) 10.125 3.75
January 31, 1997 30-5/8 7-1/4
April 30, 1997 17-3/8 11-1/4
July 31, 1997 18 12-1/4
- ------------------------
(1) These prices have been adjusted to reflect the one-for-four reverse stock
split that was effected at the close of business on November 18, 1996.
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<PAGE>
The Company had approximately 108 shareholders of record as of July 31,
1997, which does not include shareholders whose shares are held in street or
nominee names. Management of the Company believes that there are over 600
beneficial owners of its Common Stock.
Holders of Common Stock are entitled to receive dividends as may be
declared by the Board of Directors out of funds legally available therefor. No
dividends have been declared to date by the Company, nor does the Company
anticipate declaring and paying cash dividends in the foreseeable future.
Item 6 - Management's Discussion and Analysis or Plan of Operation
- ------------------------------------------------------------------
Overview
The Company began to develop software conversion tools for VAX/VMS users to
convert to UNIX environments in 1987. The Company's total revenues have
increased from $1,382,536 in fiscal 1995 to $2,097,011 in fiscal 1996 and
$2,488,374 in fiscal 1997. Income before income tax increased from $382,394 in
fiscal 1995 to $1,157,280 in fiscal 1996 and $1,166,218 in fiscal 1997, while
net income increased from $382,394 in fiscal 1995 to $1,192,780 in fiscal 1996,
then decreased to $965,218 in fiscal 1997 after a provision for income taxes of
$201,000. The growth in revenues reflects the Company's decision in fiscal 1994
to develop specialized consulting services which can be delivered with the
Company's software tools as an integrated solution to clients' conversion needs.
The Company's consulting services accounted for approximately $294,130 (21.2% of
total revenues) in 1995, $1,074,744 (51.2% of total revenues) in 1996 and
$1,090,473 (43.8% of total revenues) in 1997. The growth in revenues and net
income also reflects the Company's success in establishing international sales,
which accounted for approximately 22% of total revenues in fiscal 1997 as
compared to 15% of total revenues in fiscal 1996 and 7% of total revenues in
fiscal 1995. Future revenues from sales of the Company's products and services
are dependent upon sales of the Company's Year 2000 product and services to
users of VAX/VMS Legacy Systems and UNIX systems, while continuing to provide
conversion services for access to UNIX or NT environments.
The Company derives its revenue primarily from software license fees,
software maintenance fees and professional service fees. The Company's software
is licensed to primarily Fortune 1,000 companies and governmental organizations
worldwide. Professional services are provided in conjunction with software
products and also are sold separately if required by the customer. In addition,
the Company realizes license revenue from sales of software by licensees who
have embedded the Company's software in their software pursuant to run time
licenses. The Company's products and services are marketed through its sales
force, both domestically and internationally.
Revenue is recognized for consulting services as services are performed.
Revenue is recognized on product licensing agreements when the Company
substantially completes its obligations under the agreement and the customer has
accepted the product. Revenue is recognized for customer support services on
maintenance agreements using the straight-line method over the term of the
agreement. In connection with its software business, the Company functions as a
value-added reseller of computer software, in that it licenses certain software
from unaffiliated third parties that is included within certain of its software
products. The Company recognizes revenue when the computer software is
delivered.
-21-
<PAGE>
Selected Financial Data
The following selected financial data should be read in conjunction with
the financial statements and related notes thereto appearing elsewhere in this
Form 10-KSB. The selected financial data as of July 31, 1996 and 1997 and for
each of the three years in the period ended July 31, 1997 have been derived from
the financial statements of the Company which have been audited by the Company's
independent auditors and are included elsewhere in this Form 10-KSB. The
selected financial data for each of the two years in the period ended July 31,
1994 have been derived from the audited financial statements of the Company not
included herein. The selected financial data provided below is not necessarily
indicative of the future results of operations or financial performance of the
Company.
<TABLE>
<CAPTION>
Year Ended July 31,
----------------------------------------------------------------------------
Statement of Operations Data: 1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(in thousands except per share data)
<S> <C> <C> <C> <C> <C>
Revenue:
Product license and $ 769 $ 415 $ 751 $ 684 $1,055
customer support fees
Resale of purchased software 37 150 338 338 343
Consulting fees 71 41 294 1,075 1,090
Other revenues -- 83 -- -- --
Total revenue 877 689 1,383 2,097 2,488
Income (loss) from operations (20) (269) 370 1,114 864
Net income (loss) (10) (262) 382 1,193 965
Net income (loss) per share (.002) (.05) .06 .18 .12
Weighted average common and
common equivalent shares outstanding 5,492,500(1) 5,492,500(1) 6,591,000(1) 6,733,877(1) 7,848,364
</TABLE>
July 31,
-----------------------------
1996 1997
---- ----
Balance Sheet Data:
Working capital $1,704 $8,645
Current assets 2,011 8,996
Current liabilities 307 351
Total assets 2,317 9,849
Total liabilities 377 696
Shareholders' equity 1,940 9,153
- --------------------
(1) Adjusted to reflect the one-for-four reverse stock split effected by the
Company in November 1996.
-22-
<PAGE>
Results of Operations
The following table sets forth, for the periods indicated, the percentage
of net sales represented by certain items included in the Company's Statements
of Operations:
<TABLE>
<CAPTION>
Fiscal year ended July 31,
----------------------------------------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Total revenues 100.00% 100.00% 100.00%
Cost of services 10.69 14.86 15.98
Cost of software purchased for resale 7.32 5.61 4.13
General and administrative 19.12 9.34 19.37
Marketing and advertising 26.70 15.50 23.31
Research and development 9.40 1.57 2.46
------ ------ ------
Income from operations 26.77 53.12 34.75
Interest income 0.89 2.07 12.13
Income tax benefit (provision) 0.00 1.69 (8.08)
------ ------ ------
Net income 27.66% 56.88% 38.80%
====== ====== ======
</TABLE>
Year Ended July 31, 1997 Compared to Year Ended July 31, 1996
Total revenues for the year ended July 31, 1997, were $2,488,374 an
increase of $391,363, or 18.7%, as compared to the year ended July 31, 1996.
Consulting fees for the year ended July 31, 1997, were $1,090,473, an increase
of $15,729, or 1.5% as compared to the year ended July 31, 1996, and represented
43.8% of total revenues. This increase was primarily due to an increase in Year
2000 licensing fees which require an annual 20% of purchase price maintenance
fee. Product license and customer support fees for the year ended July 31, 1997,
were $1,055,026, an increase of $371,029, or 54.2%, as compared to the year
ended July 31, 1996. This increase is primarily due to the sale of Year 2000
factory licenses and tools. Revenues from the resale of purchased software for
the year ended July 31, 1997, were $342,875, an increase of $4,605, or 1.4%, as
compared to the year ended July 31, 1996.
During the year ended July 31, 1997, revenues from a single customer were
$317,800, representing 12.8% of total revenues. In comparison, revenues from the
Company's three largest customers were $239,025, $282,100 and $353,075,
representing 11.4%, 13.5% and 16.8%, respectively, of the Company's revenues for
the year ended July 31, 1996. The loss of a major customer could have a
significant impact on the Company's financial performance in any given year.
Cost of services for the year ended July 31, 1997, was $397,741, an
increase of $86,207, or 27.7%, as compared to the year ended July 31, 1996. Cost
of services as a percentage of revenues from both consulting fees and product
license and customer support fees increased from 17.7% for the year ended July
31, 1996, to 18.5% for the year ended July 31, 1997. This increase occurred
principally because of the increased concentration of Company resources and
personnel in delivery of consulting services.
-23-
<PAGE>
Cost of software purchased for resale for the year ended July 31, 1997, was
$102,783, a decrease of $14,954 or 12.7%, as compared to the year ended July 31,
1996.
General and administrative expenses for the year ended July 31, 1997, were
$481,952, an increase of $286,150, or 146.1%, as compared to the year ended July
31, 1996. This increase was principally due to an increase in the number of
employees and related costs.
Marketing and advertising expenses for the year ended July 31, 1997 was
$580,143, an increase of $255,181, or 78.5%, as compared to the year ended July
31, 1996. This increase was principally due to increased employee costs,
attendance at several major Year 2000 trade shows, production of marketing
materials and direct mailing costs.
Research and development expenses for the year ended July 31, 1997, were
$61,324, an increase of $28,286, or 85.6%, as compared to the year ended July
31, 1996. Technical personnel normally involved in research and development also
provided a substantial amount of technical assistance in connection with the
Company's consulting services, so that the actual amount classified as research
and development is less than would be the case if such expenses were not
allocable to specific contracts.
As a result of these factors, operating income for the year ended July 31,
1997, was $864,431, a decrease of $249,507, or 22.4%, as compared to the year
ended July 31, 1996. However, interest income for the year ended July 31, 1997,
was $301,787, an increase of 596%, as compared to the year ended July 31, 1996.
This increase resulted from the investment in interest bearing instruments of
net proceeds from the Company's public securities offering that closed on
November 22, 1996.
Net income for the year ended July 31, 1997, was $965,218, a decrease of
$227,562, or 19.1%, as compared to the year ended July 31, 1996. This decrease
was due to a provision for income taxes of $201,000.
Year Ended July 31, 1996 Compared to Year Ended July 31, 1995
Total revenues for the year ended July 31, 1996, were $2,097,011 an
increase of $714,475, or 51.68%, as compared to the year ended July 31, 1995.
Consulting fees for the year ended July 31, 1996, were $1,074,744, an increase
of $780,614, or 265.40% as compared to the year ended July 31, 1995, and
represented 51.25% of total revenues. This increase primarily resulted from
management's continued emphasis in fiscal 1996 on marketing of consulting
services with less emphasis on marketing of products alone. Management expects
this trend to continue in the future. Product license and customer support fees
for the year ended July 31, 1996, were $683,997, a decline of $66,587, or 8.87%,
as compared to the year ended July 31, 1995. This decline is consistent with the
emphasis on consulting noted above. Revenues from the resale of purchased
software for the year ended July 31, 1996, were $338,270, an increase of $448,
or 0.13%, as compared to the year ended July 31, 1995.
During the year ended July 31, 1996, sales to the Company's three largest
customers were $239,025, $282,100 and $353,075, representing 11.40%, 13.45% and
16.84% of the Company's revenues, respectively. In comparison, sales to a single
customer represented 10.88% of total revenues for the year ended July 31, 1995.
The loss of a major customer could have a significant impact on the Company's
financial performance in any given year.
Cost of services for the year ended July 31, 1996, was $311,534, an
increase of $163,791, or 110.86%, as compared to the year ended July 31, 1995.
Cost of services as a percentage of revenues from both consulting fees and
-24-
<PAGE>
product license and customer support fees increased from 14.14% for the year
ended July 31, 1995 to 17.71% for the year ended July 31, 1996. This increase
occurred principally because of the increased concentration of Company resources
and personnel in delivery of consulting services.
Cost of software purchased for resale for the year ended July 31, 1996, was
$117,737, an increase of $16,471 or 16.27%, as compared to the year ended July
31, 1995. This increase was directly related to the increased sales of products
and related consulting services.
General and administrative expenses for the year ended July 31, 1996 were
$195,802, a decrease of $68,563, or 25.93%, as compared to the year ended July
31, 1995. This decrease was principally due to reduced salary cost that resulted
from the departure of a senior executive who was not replaced.
Marketing and advertising expenses for the year ended July 31, 1996 were
$324,962, a decrease of $44,203, or 11.97%, as compared to the year ended July
31, 1995. This decrease was principally due to decreased advertising in trade
publications and termination of direct mail advertising. Management believes
that advertising the Company's services and products electronically on the
Company's web page is a more cost efficient and effective method to reach the
Company's target markets.
Research and development expenses for the year ended July 31, 1996 were
$33,038, a decrease of $96,921, or 74.58%, as compared to the year ended July
31, 1995. This decrease resulted because technical personnel normally involved
in research and development provided a substantial amount of technical
assistance in connection with the Company's consulting services. For the year
ended July 31, 1996, $193,621 of cost of service represented assistance from
these technical personnel with consulting projects.
Interest income for the year ended July 31, 1996, was $43,342, an increase
of 250.78%, as compared to the year ended July 31, 1995. This increase resulted
from increased cash flows from operations, that could be invested in interest
bearing instruments.
As a result of these factors, operating income for the year ended July 31,
1996, was $1,113,938, an increase of $743,900, or 201.03%, as compared to the
year ended July 31, 1995. Net income for the year ended July 31, 1996, was
$1,192,780, an increase of $810,386, or 211.92%, as compared to the year ended
July 31, 1995.
Liquidity and Capital Resources
Although the Company traditionally has relied principally upon internally
generated funds to finance its operations and growth, during the year ended July
31, 1997, the Company derived $6,247,707 from the net proceeds of a public
offering of its Common Stock. Thus, during the year ended July 31, 1997, cash
and cash equivalents increased 460% from $1,407,026 to $7,877,932. Shareholders'
equity increased 372% from $1,939,716 at July 31, 1996, to $9,152,641 at July
31, 1997. However, the Company generated $907,642 cash from operations during
the year ended July 31, 1997, compared to $1,150,515 cash from operations
generated during the year ended July 31, 1996. At July 31, 1997, the Company had
working capital of $8,645,083 and cash equivalents of $7,877,932.
-25-
<PAGE>
Item 7 - Financial Statements
- -----------------------------
The response to this item is submitted as a separate section of this report
beginning on page F-1.
Item 8 - Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
- --------------------------------------------------------------------------------
The Company has not had any reported or material disagreement with its
accountants on any matter of accounting principles, practices or financial
statement disclosure.
PART III
Item 9 - Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
- --------------------------------------------------------------------------------
Set forth below is certain information concerning the directors, executive
officers and key employees of the Company as of the date hereof.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
Directors and Executive Officers
<S> <C> <C>
Thomas V. Geimer 50 Chairman of the Board of Directors,
Secretary, Chief Financial Officer,
Chief Executive Officer
Harry J. Fleury 50 President
David C. Wilhelm(1) 78 Director
A. Alexander Arnold III(1) 56 Director
Key Employees
Timothy Fitzpatrick 42 Vice President Sales and Marketing
Dr. Franz Huber 52 Chief Scientist
</TABLE>
- ----------------------------------
(1) Members of the Audit and Compensation Committees
Officers are appointed by and serve at the discretion of the Board of
Directors. Each director holds office until the next annual meeting of
shareholders or until a successor has been duly elected and qualified. All of
the Company's officers devote their full-time to the Company's business and
affairs. There are no family relationships between any directors, executive
officers or key employees.
Thomas V. Geimer has been the Chairman of the Board of Directors and a
director of the Company since 1984. He currently serves as the Chief Executive
Officer, Chief Financial Officer and Secretary of the Company. Mr. Geimer is
responsible for development of the Company's business strategy, day to day
operations, accounting and finance functions and federal government sales
relationships. Before assuming full-time responsibilities at the Company, Mr.
Geimer founded and operated an investment banking firm.
-26-
<PAGE>
Harry J. Fleury has served as President of the Company since June 1995. Mr.
Fleury is responsible for engineering activities and strategies of the Company,
and for international sales. From March 1993 until June 1995, Mr. Fleury was
Vice President of International Sales of the Company with responsibility for
developing and directing international sales. Prior to joining the Company in
1993, Mr. Fleury was employed by Digital Equipment Corporation serving in a
variety of engineering and management positions for over 26 years. Mr. Fleury
managed DEC's European, Asian and Pacific corporate engineering groups that were
responsible for service capability worldwide, for internal and external products
and for strategic, operational and tactical direction. Mr. Fleury received an
electrical engineering degree in 1967 from Vermont Technical Engineering
College.
David C. Wilhelm has been a director of the Company since June 1988. For
the past 30 years, Mr. Wilhelm has been President of Wilhelm Co., an
agribusiness company located in Denver, Colorado, which is principally engaged
in the cattle feeding and commodity business. Since 1972, Mr. Wilhelm has been a
director of Colorado National Bank located in Denver, Colorado. Mr. Wilhelm is a
member of the International Executive Service Corp., and was formerly the
Director of the Colorado Cattlemen's Association. Mr. Wilhelm received a
Bachelor of Arts in American History from Yale University in 1942.
A. Alexander Arnold III has served as a director of the Company since
September 1992. For the past 25 years, Mr. Arnold has served as a Managing
Director of Trainer, Wortham & Co., Inc., a New York City-based investment
counselor firm, which Mr. Arnold co-founded. Mr. Arnold received a Bachelor of
Arts degree from Rollins College in 1964 and a Masters of Business
Administration from Boston University in 1966.
Timothy Fitzpatrick has served as Vice President of Sales and Marketing of
the Company since 1992. Mr. Fitzpatrick is responsible for domestic marketing
and sales of the Company's products and services. From 1989 to 1992, Mr.
Fitzpatrick was employed as Vice President of Software Translations, Inc. He was
General Manager of Datavision (UK) Ltd. from 1987 to 1989. Mr. Fitzpatrick
received a Bachelor of Arts Degree in City Planning from Michigan State
University.
Dr. Franz Huber has served as Chief Scientist of the Company since 1988.
Dr. Huber is responsible for the design and development of the Company's
software products. Prior to joining the Company, Dr. Huber (i) taught Computer
Science at the University of Colorado; (ii) taught Computer Applications in
Biomedical Research at the University of Colorado Medical Center; and (iii)
worked for several technology companies in various research and development,
scientific and technical positions. Dr. Huber received his Ph.D. in Physics from
the University of Vienna, Austria in 1968.
Board Committees
The Board of Directors maintains a Compensation Committee and an Audit
Committee. The Compensation Committee is composed of Messrs. Arnold and Wilhelm,
the Company's non-management directors. The primary function of the Compensation
Committee is to review and make recommendations to the Board with respect to the
compensation, including bonuses, of the Company's officers and to administer the
Company's stock option plan. The Audit Committee is comprised of Messrs. Arnold
and Wilhelm. The function of the Audit Committee is to review and approve the
scope of audit procedures employed by the Company's independent auditors, to
review and approve the audit reports rendered by the Company's independent
auditors and to approve the audit fee charged by the independent auditors. The
Audit Committee reports to the Board of Directors with respect to such matters
and recommends the selection of independent auditors.
-27-
<PAGE>
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities and Exchange Act of 1934, as amended,
generally requires the Company's directors and executive officers and persons
who own more than 10% of a registered class of the Company's equity securities
("10% owners") to file with the Securities and Exchange Commission initial
reports of ownership and reports of changes in ownership of Common Stock and
other equity securities of the Company. directors executive officers and 10%
owners are required by Securities and Exchange Commission regulation to furnish
the Company with copies of all Section 16(a) forms they file. To the Company's
knowledge, based solely on review of copies of such reports furnished to the
Company and verbal representations that no other reports were required to be
filed during the fiscal year ended July 31, 1997, all Section 16(a) filing
requirements applicable to its directors, executive officers and 10% owners were
met, except that: (i) Mr. Wilhelm, a director of the Company, failed to file
Forms 4 for the months of July and August 1997 to report sales of an aggregate
of 87,400 shares in the open market, which will be reported in an appropriate
filing with the Securities and Exchange Commission; (ii) Mr. Arnold, a director
of the Company, failed to file Forms 4 for the months of February, March and
June 1997 to report sales of an aggregate of 150,000 shares in the open market
by certain trusts for which he is a trustee, which will be reported in an
appropriate filing with the Securities and Exchange Commission; and (iii) Mr.
Geimer, an executive officer and director of the Company failed to file a Form 4
for the month of December 1996 to report the sale of 60,000 shares to the
Underwriter of the Company's second public offering in connection with the
Underwriter's exercise of its over-allotment option, which will be reported in
an appropriate filing with the Securities and Exchange Commission.
-28-
<PAGE>
Item 10 - Executive Compensation
Summary Compensation Table. The following table sets forth the annual and
long-term compensation for services in all capacities to the Company in the
three fiscal years ended July 31, 1997, of Thomas V. Geimer and Harry J. Fleury,
who are the Company's most highly compensated executive officers, and Timothy
Fitzpatrick, a key employee of the Company.
<TABLE>
<CAPTION>
Long Term
Annual Compensation Compensation
--------------------------------------------------------- -------------
Other Securities
Name and Fiscal Annual Underlying
Principal Position Year Salary Bonus Compensation Options
- ------------------ ---- ------ ----- ------------ -----------
<S> <C> <C> <C> <C>
Thomas V. Geimer 1997 $89,423 $75,000(1) $ 3,000(2) --
Chief Executive Officer 1996 $70,458 $37,500(1) $ -- 1,200,000(3)
and Chief Financial 1995 $64,250 $ -- $ -- --
Officer
Harry J. Fleury 1997 $69,076 $ 6,025(4) $ -- --
President 1996 $61,000 $10,331(4) $ -- --
1995 $50,000 $ 6,685(4) $ -- 100,000(5)
Timothy Fitzpatrick 1997 $62,885 $40,443(6) $ -- --
Vice President 1996 $57,885 $44,030(6) $ -- --
Sales and Marketing 1995 $55,000 $23,657(6) $ -- --
</TABLE>
- ----------------------------
(1) Represents deferred compensation for Mr. Geimer pursuant to the Company's
deferred compensation plan, $37,500 of which vested during the fiscal year
ended July 31, 1996, and $75,000 of which vested during the fiscal year
ended July 31, 1997.
(2) Represents reimbursement of premium on life insurance.
(3) Represents stock options and warrants to purchase an aggregate of 1,200,000
shares at an exercise price of $0.24 per share that were extended until
December 31, 1997. As of the date of this Report, all of the options and
warrants have been exercised. See Note 8 to Financial Statements for
further information.
(4) Includes sales commissions earned by Mr. Fleury on revenues from certain
international sales.
(5) Represents stock options to purchase 100,000 shares at an exercise price of
$0.36 per share .
(6) Represents sales commissions earned by Mr. Fitzpatrick on revenues from
certain domestic sales.
Option/Warrant Values. The following table provides certain information
concerning the fiscal year end value of unexercised options or warrants held by
Mr. Fleury and Mr. Geimer, each of whom served as the Company's chief executive
officer during a portion of 1996, and for Mr. Fitzpatrick.
-29-
<PAGE>
<TABLE>
<CAPTION>
Aggregated Option Exercises in 1997 Fiscal Year
and Fiscal Year End Option Values
Shares Number of Unexercised Value of Unexercised
Acquired on Value Options at Fiscal Year In-the-Money Options
Name Exercise Realized End at Fiscal Year End(1)
- ---- -------- -------- ------------------------ ----------------------
Exer- Unexer- Exer- Unexer-
cisable cisable cisable cisable
------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Harry J. Fleury 0 0 100,000 0 $ 1,346,000 0
Thomas V. Geimer 60,000 $369,900 1,140,000 0 $15,461,250 0
Timothy Fitzpatrick 30,000 $181,350 95,000 0 $ 1,277,987 0
</TABLE>
- ------------------------------------
(1) Value calculated by determining the difference between the closing sales
price on July 31, 1997, of $13.8125 per share and the exercise price of the
options or warrants. Fair market value was not discounted for restricted
nature of any stock purchased on exercise of these options or warrants.
Compensation Pursuant to Plans
Employee Retirement Plan. During fiscal year 1996, the Company established
a SARSEP-IRA employee pension plan that covers substantially all full-time
employees. Under the plan, employees have the option to contribute up to the
lesser of 15% of their compensation or $9,240. The Company may make
discretionary contributions to the plan based on recommendations from the Board
of Directors. For the year ended July 31, 1997, the Company contributed an
aggregate of $15,360 to the plan.
Deferred Compensation Plan. In January 1996, the Company established a
deferred compensation plan for the Company's employees. The Company may make
discretionary contributions to the plan based upon recommendations from the
Board of Directors. For each of the fiscal years ended July 31, 1996 and 1997,
the Company contributed $75,000 to the plan.
Options and Warrants. The Company currently has outstanding an aggregate of
335,000 options issued to employees of the Company pursuant to the Company's
1987 non-qualified stock option plan (the "1987 Plan"). The 335,000 options are
exercisable at a price of $0.36 per share. The Company's Board of Directors
during the 1994 fiscal year adopted a resolution providing that for so long as a
recipient of an option grant remains in the employ of the Company, the options
held will not expire and if the recipient's employment is terminated, the holder
will have up to 90 days after termination to exercise any vested but previously
unexercised options. In 1997, the Board of Directors passed a further resolution
clarifying that upon the death of an optionee, an unexercised option will remain
exercisable for a period of one year by, and only by, the person to whom the
optionee's rights have passed by will or by the laws of descent and
distribution. All options previously granted are administered by the Company's
Board of Directors. The options provide for adjustment of the number of shares
issuable in the case of stock dividends or stock splits or combinations and
adjustments in the case of recapitalization, merger or sale of assets.
On October 14, 1997, Thomas V. Geimer exercised an aggregate of 1,140,000
warrants and options (the "Geimer Warrants") to acquire 1,140,000 shares of the
Company's common stock at an exercise price of $0.24 per share. Under the terms
of the Rabbi Trust the shares will be held in the trust, and carried as treasury
stock by the Company. The Rabbi Trust provides that upon Mr. Geimer's death,
-30-
<PAGE>
disability, or termination of his employment the shares will be released ratably
over the subsequent ten (10) years, unless the Board of Directors determines
otherwise. See Note 8 to the Financial Statement for further information.
The Board of Directors of the Company has adopted an incentive stock option
plan (the "Qualified Plan") which provides for the grant of options to purchase
an aggregate of not more than 700,000 shares of the Company's Common Stock. The
purpose of the Qualified Plan is to make options available to management and
employees of the Company in order to provide them with a more direct stake in
the future of the Company and to encourage them to remain with the Company. The
Qualified Plan provides for the granting to management and employees of
"incentive stock options" within the meaning of Section 422 of the Internal
Revenue Code of 1986 (the "Code").
The Board of Directors of the Company has adopted a non-qualified stock
option plan (the "Non-Qualified Plan") which provides for the grant of options
to purchase an aggregate of not more than 300,000 shares of the Company's Common
Stock. The purpose of the Non-Qualified Plan is to provide certain key
employees, independent contractors, technical advisors and directors of the
Company with options in order to provide additional rewards and incentives for
contributing to the success of the Company. These options are not incentive
stock options within the meaning of Section 422 of the Code.
The Qualified Plan and the Non-Qualified Plan (the "Stock Option Plans")
will be administered by a committee (the "Committee") appointed by the Board of
Directors which determines the persons to be granted options under the Stock
Option Plans and the number of shares subject to each option. No options granted
under the Stock Option Plans will be transferable by the optionee other than by
will or the laws of descent and distribution and each option will be
exercisable, during the lifetime of the optionee, only by such optionee. Any
options granted to an employee will terminate upon his ceasing to be an
employee, except in limited circumstances, including death of the employee, and
where the Committee deems it to be in the Company's best interests not to
terminate the options.
The exercise price of all incentive stock options granted under the
Qualified Plan must be equal to the fair market value of such shares on the date
of grant as determined by the Committee, based on guidelines set forth in the
Qualified Plan. The exercise price may be paid in cash or (if the Qualified Plan
shall meet the requirements of rules adopted under the Securities Exchange Act
of 1934) in Common Stock or a combination of cash and Common Stock. The term of
each option and the manner in which it may be exercised will be determined by
the Committee, subject to the requirement that no option may be exercisable more
than 10 years after the date of grant. With respect to an incentive stock option
granted to a participant who owns more than 10% of the voting rights of the
Company's outstanding capital stock on the date of grant, the exercise price of
the option must be at least equal to 110% of the fair market value on the date
of grant and the option may not be exercisable more than five years after the
date of grant.
The Stock Option Plans were approved by the Company's shareholders at a
Special Shareholders Meeting held on November 8, 1996. As of July 31, 1997,
25,000 options, exercisable at $7.25 per share of Common Stock, had been issued
to each of Messrs. Wilhelm and Arnold pursuant to the Non-Qualified Plan.
Item 11 - Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of July 31, 1997 by (i) each person
who is known by the Company to own beneficially more than 5% of the Company's
outstanding Common Stock; (ii) each of the Company's executive officers,
-31-
<PAGE>
directors and key employees; and (iii) all executive officers and directors as a
group. Common Stock not outstanding but deemed beneficially owned by virtue of
the right of an individual to acquire shares within 60 days is treated as
outstanding only when determining the amount and percentage of Common Stock
owned by such individual. Except as noted, each person or entity has sole voting
and sole investment power with respect to the shares shown.
Shares Beneficially Owned
Name and Address -------------------------
of Beneficial Owner Number Percent
- ------------------- ------ -------
Thomas V. Geimer(1), (2) 1,190,000 15.2%
Harry J. Fleury(1), (3) 193,750 2.8%
Timothy Fitzpatrick(1),(4) 95,000 1.4%
Dr. Franz Huber(1),(4) 95,000 1.4%
A. Alexander Arnold III(5) 1,100,000 16.4%
845 Third Ave., 6th Flr
New York, NY 10021
David C. Wilhelm(6) 261,350 3.9%
3130 E. Exposition Street
Denver, CO 80209
Solar Satellite (7) 527,650 7.9%
Communication, Inc.
5650 Greenwood Plaza Blvd.
#107
Englewood, CO 80111
Executive Officers and Directors 2,745,100 34.4%
as a Group (4 persons)
- ---------------------------------
(1) The address for Messrs. Geimer, Fleury, Fitzpatrick and Huber is 303 E.
17th Ave., #108, Denver, CO 80203.
(2) Includes 1,140,000 shares which may be purchased by Mr. Geimer upon
exercise of his warrants and options. Mr. Geimer exercised these options
and warrants on October 14, 1997, and simultaneously contributed the shares
acquired to a Rabbi Trust. See Note 8 to Financial Statements for further
information.
(3) Includes 100,000 shares which may be purchased by Mr. Fleury upon exercise
of options.
(4) Represents shares which may be acquired by Messrs. Fitzpatrick and Huber
upon exercise of their options.
(5) Represents 1,075,000 shares held by four trusts. Mr. Arnold merely serves
as trustee for each of those trusts but is not a beneficiary of and has no
pecuniary interest in any of those trusts. Also includes 25,000 shares
which may be purchased by Mr. Arnold upon the exercise of options.
(6) Includes 236,350 shares held by the Jean C. Wilhelm Trust, of which Mr.
Wilhelm is the lifetime beneficiary and trustee, and 25,000 shares which
may be purchased by Mr. Wilhelm upon exercise of options.
(7) Solar Satellite Communication, Inc. is not affiliated with any of the
Company's officers, directors, key employees or other principal
shareholders. Based upon its review of certain reports filed with the
Securities and Exchange Commission and certain other inquiries, management
believes that Solar Satellite is an inactive company that is controlled by
certain Japanese Nationals and a company controlled by those persons.
-32-
<PAGE>
Item 12 - Certain Relationships and Related Transactions
- --------------------------------------------------------
During fiscal year 1996, the Company established a deferred compensation
plan for the Company's employees. The Company may make discretionary
contributions to the plan based on recommendations from the Board of Directors.
As of July 31, 1997, the deferred compensation agreement was funded in the
amount of $150,000 for Thomas V. Geimer, and Mr. Geimer was vested in $112,500
of this amount. The balance of $37,500 will vest by January 31, 1998.
There were no other transactions or series of transactions for the fiscal
year ended July 31, 1997 nor are there any currently proposed transactions, or
series of the same to which the Company is a party, in which the amount involved
exceeds $60,000 and in which, to the knowledge of the Company, any director,
executive officer, nominee, five percent shareholder or any member of the
immediate family of the foregoing persons, have or will have a direct or
indirect material interest.
Item 13 - Exhibits and Reports on Form 8-K
- ------------------------------------------
(a) Exhibits
There are no exhibits filed with this Annual Report
(b) Reports on Form 8-K
The Company has not filed a report on Form 8-K during the last quarter of
the fiscal year ended July 31, 1997.
-33-
<PAGE>
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ACCELR8 TECHNOLOGY CORPORATION
Date: October 29, 1997 By: /s/ HARRY J. FLEURY
------------------------- ---------------------------------
Harry J. Fleury, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Date: October 29, 1997 /s/ THOMAS V. GEIMER
------------------------ --------------------------------
Thomas V. Geimer, Secretary,
Chief Executive Officer and
Chief Financial Office
Date: October 29, 1997 /s/ A. ALEXANDER ARNOLD III
------------------------- --------------------------------
A. Alexander Arnold III
Date: October 29, 1997 /s/ DAVID C. WILHELM
------------------------- --------------------------------
David C. Wilhelm
-34-
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Accelr8 Technology Corporation
Denver, Colorado
We have audited the accompanying balance sheets of Accelr8 Technology
Corporation (the "Company") as of July 31, 1997 and 1996, and the related
statements of operations, shareholders' equity, and cash flows for each of the
three years in the period ended July 31, 1997. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company as of July 31, 1997 and 1996,
and the results of its operations and its cash flows for each of the three years
in the period ended July 31, 1997 in conformity with generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
Denver, Colorado
October 24, 1997
F-1
<PAGE>
ACCELR8 TECHNOLOGY CORPORATION
BALANCE SHEETS
JULY 31, 1997 AND 1996
- --------------------------------------------------------------------------------
ASSETS 1997 1996
CURRENT ASSETS:
Cash and cash equivalents $ 7,877,932 $ 1,407,026
Accounts receivable 910,334 431,252
Prepaid expenses and other 26,800 49,695
Deferred tax assets (Note 5) 181,400 123,223
----------- -----------
Total current assets 8,996,466 2,011,196
----------- -----------
PROPERTY AND EQUIPMENT:
Computer equipment 231,254 209,735
Furniture and fixtures 32,476 11,231
----------- -----------
Total property and equipment 263,730 220,966
Less accumulated depreciation (96,594) (150,453)
----------- -----------
Net property and equipment 167,136 70,513
----------- -----------
SOFTWARE DEVELOPMENT COSTS, less accumulated
amortization: 1997, $875,046; 1996, $746,260 506,322 160,321
INVESTMENTS (Note 6) 179,020 75,000
----------- -----------
TOTAL $ 9,848,944 $ 2,317,030
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILTIES:
Accounts payable $ 97,499 $ 52,091
Income taxes payable 47,394 18,000
Accrued liabilities 56,360 20,316
Product development advance payable (Note 2) 0 50,000
Deferred consulting revenue 46,252 91,724
Deferred maintenance revenue 103,878 75,460
----------- -----------
Total current liabilities 351,383 307,591
----------- -----------
DEFERRED TAX LIABILITIES (Note 5) 203,400 69,723
----------- -----------
OTHER LONG-TERM LIABILITIES (Note 6) 141,520 0
----------- -----------
COMMITMENTS (Note 6)
SHAREHOLDERS' EQUITY (Notes 3 and 6):
Common stock, no par value; 11,000,000 shares
authorized: 6,692,500 and 5,492,500 shares
issued and outstanding 8,218,677 1,970,970
Contributed capital 41,449 41,449
Retained earnings (deficit) 892,515 (72,703)
----------- -----------
Shareholders' equity 9,152,641 1,939,716
----------- -----------
TOTAL $ 9,848,944 $ 2,317,030
=========== ===========
See notes to financial statements.
F-2
<PAGE>
<TABLE>
<CAPTION>
ACCELR8 TECHNOLOGY CORPORATION
STATEMENTS OF OPERATIONS
YEARS ENDED JULY 31, 1997, 1996 AND 1995
- ------------------------------------------------------------------------------------------------------------
1997 1996 1995
REVENUES:
<S> <C> <C> <C>
Consulting fees $ 1,090,473 $ 1,074,744 $ 294,130
Product license and customer
support fees (Note 2) 1,055,026 683,997 750,584
Resale of purchased software 342,875 338,270 337,822
----------- ----------- -----------
Total revenues 2,488,374 2,097,011 1,382,536
----------- ----------- -----------
COSTS AND EXPENSES:
Cost of services 397,741 311,534 147,743
Cost of software purchased for resale 102,783 117,737 101,266
General and administrative 481,952 195,802 264,365
Marketing and advertising 580,143 324,962 369,165
Research and development 61,324 33,038 129,959
----------- ----------- -----------
Total expenses 1,623,943 983,073 1,012,498
----------- ----------- -----------
INCOME FROM OPERATIONS 864,431 1,113,938 370,038
INTEREST INCOME 301,787 43,342 12,356
----------- ----------- -----------
INCOME BEFORE INCOME TAXES 1,166,218 1,157,280 382,394
----------- ----------- -----------
INCOME TAX (PROVISION) BENEFIT
(Note 5):
Current (125,500) (18,000) 0
Deferred (75,500) 53,500 0
----------- ----------- -----------
Total (provision) benefit (201,000) 35,500 0
----------- ----------- -----------
NET INCOME $ 965,218 $ 1,192,780 $ 382,394
=========== =========== ===========
WEIGHTED AVERAGE COMMON AND
COMMON EQUIVALENT SHARES
OUTSTANDING (Note 8) 7,848,364 6,733,877 6,591,000
=========== =========== ===========
NET INCOME PER SHARE $ 0.12 $ 0.18 $ 0.06
=========== =========== ===========
See notes to financial statements.
F-3
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ACCELR8 TECHNOLOGY CORPORATION
STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED JULY 31, 1997, 1996 AND 1995
- ---------------------------------------------------------------------------------------------------------------------------
Common Stock Retained Total
----------------------------- Contributed Earnings Shareholders'
Shares Amount Capital (Deficit) Equity
<S> <C> <C> <C> <C> <C>
BALANCE, JULY 31, 1994 5,492,500 $ 1,970,970 $ 41,449 $(1,647,877) $ 364,542
Net income 0 0 0 382,394 382,394
----------- ----------- ----------- ----------- -----------
BALANCE, JULY 31, 1995 5,492,500 1,970,970 41,449 (1,265,483) 746,936
Net income 0 0 0 1,192,780 1,192,780
----------- ----------- ----------- ----------- -----------
BALANCE, JULY 31, 1996 5,492,500 1,970,970 41,449 (72,703) 1,939,716
Proceeds from issuance of
common stock, net of
offering costs of $317,093 1,000,000 6,182,907 0 0 6,182,907
Proceeds from exercise of
stock optons 200,000 64,800 0 0 64,800
Net income 0 0 0 965,218 965,218
----------- ----------- ----------- ----------- -----------
BALANCE, JULY 31, 1997 6,692,500 $ 8,218,677 $ 41,449 $ 892,515 $ 9,152,641
=========== =========== =========== =========== ===========
See notes to financial statements.
F-4
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ACCELR8 TECHNOLOGY CORPORATION
STATEMENTS OF CASH FLOWS
YEARS ENDED JULY 31, 1997, 1996 AND 1995
- ------------------------------------------------------------------------------------------------------------
1997 1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income $ 965,218 $ 1,192,780 $ 382,394
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 166,819 121,600 139,072
Write-off of product development
advance payable (50,000) 0 0
Deferred income tax provision (benefit) 75,500 (53,500) 0
Net change in assets and liabilities:
Accounts receivable (479,082) (138,716) (108,984)
Prepaid expenses 22,895 (48,525) 6,705
Accounts payable 45,408 (8,050) 30,599
Income taxes payable 29,394 18,000 0
Accrued liabilities 36,044 (10,457) 8,001
Deferred consulting revenue (45,472) 91,724 0
Deferred maintenance revenue 28,418 (14,341) 2,823
Other long-term liabilities 141,520 0 0
----------- ----------- -----------
Net cash provided by operating activities 936,662 1,150,515 460,610
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Software development costs (474,788) (80,543) (108,510)
Purchase of computer equipment (113,410) (25,371) 0
Purchase of furniture and fixtures (21,246) 0 0
Increase in investments (104,020) (75,000) 0
----------- ----------- -----------
Net cash used in investing activities (713,463) (180,914) (108,510)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, less
offering costs 6,247,707 0 0
----------- ----------- -----------
NET INCREASE IN CASH
AND CASH EQUIVALENTS 6,470,906 969,601 352,100
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 1,407,026 437,425 85,325
----------- ----------- -----------
CASH AND CASH EQUIVALENTS,
END OF YEAR $ 7,877,932 $ 1,407,026 $ 437,425
=========== =========== ===========
See notes to financial statements
F-5
</TABLE>
<PAGE>
ACCELR8 TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED JULY 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business - Accelr8 Technology Corporation ("Accelr8" or the "Company) is a
provider of software tools and consulting services for the conversion of
Digital Equipment Corporation ("DEC") legacy systems to UNIX open
client/server environments. The Company's consulting services and software
conversion tools enable the Company's customers to analyze and implement
their UNIX conversions in a predictable and cost-effective manner. The
Company's clients include a number of Fortune 1000 companies and government
agencies.
Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities as of 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.
Cash and Cash Equivalents - All highly liquid investments with an original
maturity of three months or less at time of purchase are considered to be
equivalent to cash.
Concentration of Credit Risk - Financial instruments that potentially
subject the Company to concentrations of credit risk consist primarily of
cash equivalents and accounts receivable. The Company places its cash
equivalents with a high credit quality financial institution. The Company
grants credit to domestic and international clients in various industries.
Exposure to losses on accounts receivable is principally dependent on each
client's financial position. The Company performs ongoing credit
evaluations of its clients' financial condition.
Property and Equipment - Property and equipment are recorded at cost.
Maintenance and repairs are charged to expense as incurred and expenditures
for major improvements are capitalized. Gains and losses from retirement or
replacement are included in operations. Depreciation of property and
equipment is computed using the straight-line method over the estimated
useful life of the assets, ranging from five to seven years.
Software Development Costs - Costs incurred internally to develop computer
software products and the costs to acquire externally developed software
products (which have no alternative future use) to be sold, leased or
otherwise marketed are charged to expense until the technological
feasibility of the product has been established. After technological
feasibility has been established and until the product is available for
general release, software development, product enhancements and acquisition
costs are capitalized. Amortization of capitalized costs is computed on a
product-by-product basis over (a) the period equal to the future revenue
stream of the product using the ratio that current revenues bears to the
total of current and future anticipated revenues of the product, or (b) the
remaining estimated economic life of the product (three years) using the
straight-line method, whichever method results in the greater amount.
Amortization expense relating to software development costs for the years
ended July 31, 1997, 1996, and 1995 was $128,787, $96,237, and $113,396,
respectively.
F-6
<PAGE>
Revenue Recognition - Revenue is recognized for consulting services as
services are performed. Revenue is recognized on product licensing
agreements when the Company substantially completes its obligations under
the agreement and the customer has accepted the product. Revenue is
recognized for customer support services on maintenance agreements using
the straight-line method over the term of the agreement.
In connection with its software business, the Company functions as a
value-added reseller of computer software. The Company recognizes revenue
when the computer software is delivered.
Deferred Revenue - Deferred consulting revenues represent amounts received
but not earned under consulting agreements. Deferred maintenance revenue
represents amounts received but not earned under maintenance agreements.
Income Taxes - The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting
for Income Taxes," which requires an asset and liability approach to
financial accounting and reporting for income taxes. Deferred income tax
assets and liabilities are computed annually for differences between the
financial statement basis and the income tax basis of assets and
liabilities that will result in taxable or deductible amounts in the
future. Such deferred income tax computations are based on enacted tax laws
and rates applicable to the years in which the differences are expected to
affect taxable income. A valuation allowance is established when necessary
to reduce deferred income tax assets to the amounts expected to be
realized.
Net Income Per Share - Net income per share is computed using the weighted
average number of common and common equivalent shares outstanding during
the period. Common stock equivalents include stock options and warrants.
Note 8 discusses options exercised after July 31, 1997 and the impact on
the calculation of per share data.
Stock Based Compensation - The Company accounts for stock based
compensation to employees and directors using the intrinsic value method in
accordance with Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees." The Company accounts for stock
based compensation to non-employees in accordance with Statement of
Financial Accounting Standards SFAS No. 123, "Accounting for Stock Based
Compensation."
New Accounting Pronouncements - During February 1997, the Financial
Accounting Standards Board ("FASB") issued SFAS No. 128, "Earnings Per
Share." SFAS No. 128, which supersedes APB No. 15, establishes new
standards for computing and presenting earnings per share. The Company is
required to adopt this Statement in fiscal year 1998, including interim
periods ending after December 15, 1997. When adopted, all prior year
earnings per share data are required to be restated. The Company does not
expect that the adoption of this Statement will have a material effect on
the Company's reported earnings per share amounts.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and
losses) in a full set of general purpose financial statements. The Company
is required to adopt SFAS No. 130 in fiscal 1999. Reclassification of
financial statements for earlier periods provided for comparative purposes
is required. The Company has not yet determined the impact of adopting this
statement on its financial statements.
F-7
<PAGE>
2. PRODUCT DEVELOPMENT ADVANCE PAYABLE
On September 4, 1991, the Company entered into an assistance agreement with
a third party, wherein the Company received an advance of $50,000 to assist
in the development of a specific software product which the Company was to
own exclusively. Development of the software product was completed and the
advance of $50,000 became payable to the third party as of July 31, 1995.
As of July 31, 1996 the amount remained outstanding and the third party had
the option of converting the outstanding balance to a interest bearing
note. As of July 31, 1997, the Company has determined that the third party
has no intention of collecting the amount; therefore, the amount was
recorded as product license and custom support fees during the year ended
July 31, 1997.
3. SHAREHOLDERS' EQUITY
Authorized Shares and Reverse Stock Split - On November 18, 1996,
shareholders approved a reduction in the number of authorized shares of the
Company's common stock from 55,000,000 to 11,000,000. Simultaneously, the
Company effected a one-for-four reverse stock split. All share and per
share amounts have been restated to reflect the reverse stock split.
Stock Option Plans - The Company has three stock-based compensation plans
and options issued to key executives which are discussed below:
Options and Warrant Agreements with Key Executives
--------------------------------------------------
The Chairman of the Board has options and warrants to purchase 1,140,000
shares of the Company's stock at $.24 per share which expire on December
31, 1997. A former President of the Company held other options to purchase
250,000 shares of the Company's common stock at $.28 per share which
expired unexercised in December 1995.
Employee Stock Option Plan
--------------------------
The Employee Stock Option Plan (the "Employee Plan") permits the granting
of non-qualified stock options to employees, officers and directors of the
Company. The exercise price of each option, which do not expire as long as
the recipient remains an employee of the Company, is equal to the market
price of the Company's common stock on the date of grant. The Company
reserved 475,000 of its authorized but unissued common stock for stock
options to be granted under the Employee Plan. During 1997, 140,000 options
were exercised, resulting in 335,000 options outstanding at July 31, 1997.
Under the terms of the Employee Plan, options vest at 25% annually. There
are no shares which remain available under the Employee Plan for future
grants.
Incentive Stock Option Plan
---------------------------
The Company has reserved 700,000 of its authorized but unissued common
stock for stock options to be granted to officers and employees of the
Company under its Incentive Stock Option Plan (the "Incentive Plan"). The
exercise price of each option, which have a maximum ten-year life, is equal
to the market price of the Company's common stock on the date of grant. As
of July 31, 1997, no options have been granted under the incentive plan.
Non-Qualified Stock Option Plan
-------------------------------
The Company has reserved 300,000 of its authorized but unissued common
stock for stock options to be granted to employees, independent
contractors, technical advisors and directors of the Company under its
Non-Qualified Stock Option Plan (the "Non-Qualified Plan"). The exercise
price of each option, which have a maximum ten-year life is issued by the
Company's compensation committee on the date of grant. As of July 31, 1997,
50,000 options have been granted under the Non-Qualified Plan at an
exercise price of $7.25 per share. Under the terms of the Non-Qualified
Plan, options vest 100% upon grant.
The Company accounts for the executive options and warrants, the Employee
Plan and the Non-Qualified Plan using the intrinsic value method in
accordance with APB No. 25 and has adopted the disclosure-only provisions
of SFAS No. 123. The Incentive Plan is excluded as there has not been any
activity to the Plan. Accordingly, no compensation expense has been
recognized for the executive options and warrants, the Employee Plan or the
Non-Qualified Plan. Had compensation cost for the Employee Plan been
determined based upon the fair value at the grant dates of awards under the
F-8
<PAGE>
Employee Plan consistent with SFAS No. 123, the Company's 1997 and 1996 net
income and income per share amounts would have been reduced to the pro
forma amounts indicated below:
Fiscal Year Fiscal Year
Ended Ended
July 31, 1997 July 31, 1996
Net income - as reported $965,218 $1,192,780
======== ==========
Net income - pro forma $635,594 $1,060,456
======== ==========
Income per share - as reported $ 0.12 $ 0.18
======== ==========
Income per share - pro forma $ 0.08 $ 0.16
======== ==========
The fair value of options granted under the Executive Options and Employee
Plan is estimated on the date of grant using the Black-Scholes option
pricing model with the following weighted-average assumptions used for
grants in 1997: no dividend yield, risk-free interest rate of 6.50%,
expected life of 10 years; and expected volatility of 95.61% . The
following weighted average assumptions were used for grants in 1996: no
dividend yield, risk-free interest rate of 6.00%; expected life of 10
years; and expected volatility of 92.93%. There were no stock options
granted in 1997.
The following table summarizes information on stock option activity for the
executive options and warrants and the Employee Plan and those granted to
certain employees via option agreements:
<TABLE>
<CAPTION>
Weighted
Average
Number of Exercise Exercise Price
Shares Price Per Share Per Share
<S> <C> <C> <C> <C>
Options and warrants outstanding, July 31, 1994 2,446,875 $0.02 - $0.04 $ 0.07
Options and warrants granted 100,000 0.02 0.02
Options and warrants expired or cancelled (134,375) 0.02 - 0.04 0.03
---------
Options and warrants outstanding, July 31, 1995 2,412,500 $0.24 - $0.36 $ 0.28
Options and warrants granted 1,212,500 0.24 - 0.36 0.25
Options and warrants expired or cancelled (1,950,000) 0.24 - 0.36 0.24
---------
Options and warrants outstanding, July 31, 1996 1,675,000 $0.24 - $0.36 $ 0.27
Options and warrants exercised (200,000) 0.36 0.36
---------
Options and warrants outstanding, July 31, 1997 1,475,000 $0.24 - $0.36 $ 0.27
=========
</TABLE>
As of July 31, 1997 all of the options outstanding are currently
exercisable.
F-9
<PAGE>
Warrants to Purchase Common Stock - In conjunction with the common stock
issued during the secondary public offering in November 1996, the Company
issued warrants to purchase 34,500 shares of Common Stock to the
Underwriter. Each warrant entitles the Underwriter to purchase one share of
no par value common stock of the Company at an exercise price equal to 120%
of the initial price to the public ($7.80 per share). The warrants are
exercisable at any time during the period November 18, 1997 to November 18,
1999.
4. MAJOR CUSTOMERS AND FOREIGN REVENUE
In fiscal year 1997, revenue of $317,800 (13%) was derived from a single
customer. In 1996, revenue of $239,025 (11%), $282,100 (13%), and $353,075
(17%) was derived from sales to three separate customers. In 1995, revenue
of $150,381 (11%) was derived from a single customer. The Company's
operations are located entirely within the United States. However, in 1997
and 1996, $539,635 (22%) and $318,393 (15%), respectively, of the Company's
revenues were to foreign customers.
5. INCOME TAXES
The following items comprise the Company's net deferred tax assets as of
July 31:
<TABLE>
<CAPTION>
1997 1996 1995
Deferred tax assets:
<S> <C> <C> <C>
Deferred income $ 55,999 $ 63,530 $ 57,848
Net operating loss (NOL) carryforwards 41,693 491,197
Alternative minimum (AMT) tax credit
carryforwards 15,301 18,000
General business credit 110,100
-------- -------- --------
Total 181,400 123,223 549,045
Valuation allowance (472,889)
-------- -------- --------
Total 181,400 123,223 76,156
Deferred tax liabilities -
depreciation and amortization (203,400) (69,723) (76,156)
-------- -------- --------
Net deferred tax assets (liabilities) $(22,000) $ 53,500 $ --
======== ======== ========
</TABLE>
As of July 31, 1995, the Company concluded that based on available
evidence, realization of existing net operating loss carryforwards was
uncertain and, accordingly, a valuation allowance was recorded. During
fiscal 1996, the Company's valuation allowance decreased $472,889 as the
result of utilization of NOL carryforwards.
F-10
<PAGE>
A reconciliation of the expected income tax expense at the federal
statutory income tax rate to the Company's actual income tax expense at its
effective income tax rate for the years ended July 31 is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Federal statutory income tax rate 34% 34% 34%
Computed "expected" income taxes $ 396,514 $ 393,475 $ 130,014
Change in taxes resulting from:
State income taxes, net of federal
tax benefit 37,945 38,190 12,237
Change in valuation allowance (472,889) (142,251)
General business credit (236,473)
Other 3,014 5,724 --
--------- --------- ---------
Income tax provision (benefit) $ 201,000 $ (35,500) $ --
========= ========= =========
</TABLE>
As of July 31, 1997, the Company has general business credit carryforwards
of $110,100 available to offset future taxable income expiring in varying
amounts through 2112. The Company also has AMT credit carryforwards of
$15,301 available to offset future regular taxable income that may be
carried forward indefinitely.
6. COMMITMENTS
Operating Leases - The Company has an operating lease agreement for office
space through December 31, 1999. Future minimum lease payments for the
years ending July 31, 1998, 1999 and 2000 are $61,227, $758,890 and
$31,710, respectively. Total rent expense was $52,781, $42,989 and $40,141
in 1997, 1996 and 1995, respectively.
Employee Retirement Plan - During the year ended July 31, 1996, the Company
established a SARSEP-IRA employee pension plan that covers substantially
all full-time employees. Under the plan, employees have the option to
contribute up to 15% of their compensation subject to dollar limitations of
the Internal Revenue Code. The Company may make discretionary contributions
to the Plan based on recommendations from the Board of Directors. For the
years ended July 31, 1997 and 1996, the Board authorized contributions
totalling $15,360 and $0, respectively.
Deferred Compensation Arrangement - During the year ended July 31, 1996,
the Company established a deferred compensation plan for key employees of
the Company using a "Rabbi" Trust. The Company may make discretionary
contributions to the plan based on recommendations from the Board of
Directors. During fiscal 1996, the Company funded deferred compensation of
$75,000 awarded to the Chairman of the Board with a deposit of $75,000 with
the "Rabbi" Trust. An additional $75,000 award was granted and funded
during fiscal 1997. The funds are subject to the general claims of
creditors and are included in investments as of July 31, 1997 and 1996. The
following information is provided related to the trust assets which
primarily consist of equity securities as of July 31, 1997 and 1996.
1997 1996
Amortized cost basis $150,000 $ 75,000
Gross unrealized holding gains 29,020
-------- --------
Aggregate fair value $179,020 $ 75,000
======== ========
F-11
<PAGE>
During the years ended July 31, 1997, 1996, and 1995, there were no sales
of available-for-sale securities.
7. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and estimated fair values of the Company's financial
instruments as of July 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1997 1996 1996
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
<S> <C> <C> <C> <C>
Cash and cash equivalents $7,877,932 $7,877,932 $1,407,026 $1,407,026
Investments 179,020 179,020 75,000 75,000
Other long-term liabilities 141,520 141,520
</TABLE>
The following methods and assumptions were used to estimate the fair value
of financial instruments:
Cash and Cash Equivalents - The carrying amount approximates fair value.
Investments - The carrying amount is based on quoted market prices. Other
Long-Term Liabilities - The carrying amount approximates fair value.
8. SUBSEQUENT EVENT
Subsequent to July 31, 1997 the options and warrants held by the Chairman
of the Board were exercised and placed into the "Rabbi" Trust discussed in
Note 6. Such shares are issuable upon the occurrence of retirement, death
or termination of the Chairman over a ten year period after such
occurrence. Because the Company owns the assets of the Rabbi Trust, the
shares of Company stock in the "Rabbi" Trust will be treated as treasury
stock for financial reporting purposes; however, as were the options and
warrants, the shares of Company stock in the "Rabbi" Trust will be treated
as common stock equivalents, which will be dilutive, for purposes of
calculating per share data.
F-12
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Form 10-K
for the year ended July 31, 1997 and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1997
<PERIOD-END> JUL-31-1997
<CASH> 7,877,932
<SECURITIES> 179,020
<RECEIVABLES> 910,334
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 8,966,466
<PP&E> 263,730
<DEPRECIATION> (96,594)
<TOTAL-ASSETS> 9,848,944
<CURRENT-LIABILITIES> 351,383
<BONDS> 0
0
0
<COMMON> 8,218,677
<OTHER-SE> 933,964
<TOTAL-LIABILITY-AND-EQUITY> 9,848,944
<SALES> 342,875
<TOTAL-REVENUES> 2,483,374
<CGS> 102,783
<TOTAL-COSTS> 500,524
<OTHER-EXPENSES> 1,123,419
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 301,787
<INCOME-PRETAX> 1,166,218
<INCOME-TAX> (201,000)
<INCOME-CONTINUING> 965,218
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 965,218
<EPS-PRIMARY> .12
<EPS-DILUTED> .12
</TABLE>
