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, 2000
[ ] 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
--------------------------------------------
(Name of small business issuer in its charter)
Colorado 84-1072256
------------------------------ -----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
303 East Seventeenth Avenue, Suite 108, Denver, Colorado 80203
--------------------------------------
(Address of principal executive offices)
Issuer's telephone number: (303) 863-8088
--------------
Securities registered pursuant to Section 12(b) of the Exchange Act: None
----
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, no par value
--------------
(Title of class)
Indicate by check mark whether the issuer (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the Registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-KSB or any amendment to this Form 10-KSB. [ ]
The Registrant's revenues for the fiscal year ended July 31, 2000 were
$1,567,389. The aggregate market value of the voting stock held by
non-affiliates of the Registrant as of November 2, 2000, was approximately
$4,034,041 based upon the last reported sale on that date. For purposes of this
disclosure, Common Stock held by persons who hold more than 5% of the
outstanding voting shares and Common Stock held by officers and directors of the
Registrant have been excluded in that such persons may be deemed to be
"affiliates" as that term is defined under the rules and regulations promulgated
under the Securities Act of 1933. This determination is not necessarily
conclusive.
The number of shares of the Registrant's Common Stock outstanding as of July 31,
2000, was 7,758,817.
Documents incorporated by reference
None
<PAGE>
TABLE OF CONTENTS
PART I PAGE
Item 1. Description of Business................................ 1
Item 2. Description of Property................................ 24
Item 3. Legal Proceedings...................................... 24
Item 4. Submission of Matters to a Vote of Security Holders.... 26
PART II
Item 5. Market for Common Equity and Related Stockholder
Matters................................................ 26
Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 29
Item 7. Financial Statements................................... 33
Item 8. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure.................... 33
PART III
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange
Act.................................................... 35
Item 10. Executive Compensation................................. 37
Item 11. Security Ownership of Certain Beneficial Owners and
Management............................................. 41
Item 12. Certain Relationships and Related Transactions......... 42
Item 13. Exhibits and Reports on Form 8-K....................... 42
SIGNATURES................................................................ 43
Financial Statements...............................................F-1 to F-5
Notes to Financial Statements.....................................F-6 to F-19
-ii-
<PAGE>
PART I
Item 1 - Description of Business
--------------------------------
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 21.
Introduction
Accelr8 Technology Corporation (the "Company") is a provider of
software tools and consulting services for system modernization solutions for
VMS legacy systems that were developed by Digital Equipment Corporation ("DEC")
and which are proprietary to Compaq Corporation ("COMPAQ") as a result of its
purchase of DEC. The Company will refer to both DEC and COMPAQ in referencing
VMS legacy systems developed by DEC. The Company's system modernization
solutions encompass two distinctly different approaches. First, for those
enterprises that have made the decision to rely upon the VMS operating system
for continued deployment of mission critical custom applications, the Company
offers services and tools that emphasize and enable a strategy of preservation
and retention of VMS running on COMPAQ Alpha platforms. Second, for those
enterprises that have chosen a modernization strategy that focuses on a move to
"open systems" featuring Unix, Linux, and/or NT operating systems, the Company
offers tools and services that support migration from VMS platforms to
client/server systems offered by COMPAQ (Tru64Unix), Hewlett-Packard (HP/UX),
Sun Microsystems (Solaris) and other Unix and Linux vendors and Microsoft
Corporation's Windows NT. The Company's "Open Evalu8" services offering provides
an in-depth analysis of existing legacy systems. The objective of this analysis
is to identify specific functionalities in a given legacy application that must
be carried over to the new environment of e-commerce because there is no
commercial off the shelf (COTS) equivalent. Likewise, this assessment may
conclude that the application should be preserved in the existing VMS
environment, and its data made available by implementation of the Company's
newest product XML for RMS, an XML (extensible mark-up language) server. The
primary purpose of the XML for RMS server is to support any Business-to-Business
("B2B") application that needs access to data that may reside in the VMS legacy
application's RMS files. By its very nature, data in a proprietary format is not
accessible to any inquiry made from outside the environment, such as those often
originating from the worldwide web (the Internet). The Company has developed two
non-invasive means of accessing the information within these applications.
<PAGE>
If the information being sought exists in the application's RMS files
then its data can be made available by implementation of the Company's newest
product, XML for RMS, and XML (eXtensible Mark-up Language) server. The
Company believes that its XML server is the only "non-relational" data XML
server available for general use with VMS legacy data. The company has recently
developed a new "data adapter" for its XML server that will access C-ISAM files
on UNIX, Linux, and NT platforms. This new product is called XML for C-ISAM.
If the information being sought is only available through the
application's screens, its data can be gathered up and delivered using CNT's
(Computer Network Technology) Enterprise/Access integration tool. Accelr8 has
signed a partnership agreement with CNT to use their integration tools to access
legacy data from applications written for the VMS and other operating systems.
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.
Legacy System Modernization. The Company offers products, training, and
custom engineering services to preserve and extend legacy systems while moving
towards an e-commerce and/or web enabled solution. The addition to our migration
services of our integration services builds on our experience working with
Legacy systems.
Migration to Open Systems. In the 1970's many businesses and
governmental organizations relied on proprietary 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, operating systems 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." These systems were never
designed to be accessed from external sites such as inquiries emanating from the
worldwide web (the Internet).
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. The United States'
Government has suggested that federal agencies operate under a "common operating
environment." Management is optimistic that this may increase the federal
government's demand for Accelr8's software tools and services.
Management believes that large hardware manufacturers, like
International Business Machines ("IBM") and COMPAQ, 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
-2-
<PAGE>
such as UNIX, Linux, 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
was manufactured by DEC (now COMPAQ) 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, the
major suppliers of hardware that feature UNIX as their operating system are
Hewlett Packard ("HP"), Sun Microsystems ("SUN"), Silicon Graphics, Inc.
("SGI"), International Business Machines ("IBM") and COMPAQ. COMPAQ has ceased
producing VAX computers.
Management believes that, within the computer user community, open
operating systems of UNIX, Linux, and NT are considered more desirable than
proprietary systems, such as VMS systems or IBM mainframe MVS systems for the
following reasons: (i) significant upgraded power at lower cost
(price/performance) than older VAX/VMS systems; (ii) viewed as being "open"
since they are compatible with a variety of hardware types (interoperability);
(iii) industry-wide standards allow software applications to run unchanged
across a wide variety of hardware platforms; (iv) de-facto development
environment for new applications; and (v) significant savings can be realized
from reduced maintenance overhead.
As a result of these open systems characteristics, VMS users requiring
increased performance from their older, existing proprietary system, may
consider the Company's conversion services to UNIX, Linux, and NT for: (i)
preserving the already sizable investment in existing custom 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.
Notwithstanding the above, Management is aware of several large VAX/VMS
environments where the VMS user has executed a modernization effort while
maintaining a commitment to VMS mission critical custom legacy applications.
The Company believes that the primary deterrent to switching from a VMS
Legacy System to a newer UNIX, Linux, or NT system is: (i) the cost, time and
risk of rewriting a critical, dependable legacy application program to run in a
new and different environment, (ii) uncertainty as to outcome, and (iii) lack of
available personnel to undertake the task and the costly re-training process
associated with learning a new operating system. These factors 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
-3-
<PAGE>
the problem, 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 consider other
strategies that support modernization while maintaining a VMS operating
environment. The most common reasons for staying on VMS are 1) high reliability
as compared to Unix and/or NT, 2) no readily available COTS package that
provides similar functionality, 3) strong desire to preserve investment in
existing hardware and software.
While most users, given the option, would elect to rewrite their
familiar legacy application to the faster environments of UNIX, Linux, and NT,
the uncertainty of a conversion causes slow decision making. Management believes
that in recent years, concern over the effects of the Year 2000 problem has also
slowed decision making.
The Company has sought to address 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. Based upon the Company's
experience in performing this service and further development of its Year 2000
for the Enterprise software, the Company now offers a much broader assessment
service called "Open Evalu8 Service."
In general, the limited functionality of many existing tools, together
with the inability of some organizations to fully use available technology, has
created increasing demand for integrated software development tools and
professional services to help organizations fully use 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 some organizations will seek to reuse existing DEC VMS applications in
client/server environments to leverage their existing systems investment.
In order to attain the advantages of open client/server environments
while preserving their investment in existing software applications, many VMS
users must undertake complex conversions to NT, Linux, or UNIX operating
systems. The Company's consulting services and software conversion tools enable
the Company's clients to analyze and implement their conversions in a
predictable and cost-effective manner. The Company's clients have included a
number of Fortune 1000 companies and government agencies, including Electronic
Data Systems Corp. (EDS), Boeing, Northrop Grumman (for the US Air Force), Delta
Air Lines Corp., DaimlerChrysler, SAIC, Raytheon, the United States Army, the
United States Navy and the Department of Energy.
The Company continues the development of additional software tools that
will complement its existing suite of transition tools and services.
-4-
<PAGE>
Open EVALU8 is one of the Company's newest tools, which is based upon
the Company's core technology. This tool will be offered with the services of
the Company's technical staff for front end assessment of legacy code that is
being modernized to interface with E-Business, B2B, and Internet based operating
systems.
Legacy Application Integration The Company offers several services to
this installed base of committed VMS users, including: 1) XML servers for RMS
and C-ISAM files for access to RMS and C-ISAM data and 2) application
integration services using CNT's Enterprise/Access integration tool.
Most Fortune 500 companies have significant investments in the computer
applications used in the automation of their business processes. In most cases
these include both off the shelf and custom developed applications. Many IT
organizations are beginning to believe that there is more value in projects that
integrate or otherwise extend the life of their current applications than those
projects that would create or implement new ones, such as an ERP implementation
that would feature an outright replacement.
Legacy applications are applications that perform vital business
functions. There is a reluctance to change them due to the age of the
application, the lack of documentation, the lack of source code, the lack of
available technical skills, or costs.
Application Integration is being driven by a number of business
activities including mergers and acquisitions, remote usage of company
applications, B2B needs, the need for increased speed to market, supply chain
management, just in time business processes, and the need to improve customer
relationship management
Accelr8's System Integration offerings provide legacy application
integration products and services that minimize invasive changes to the
application's source code and its operation.
These services can help link legacy enterprise applications with new
CRM, E-commerce, and ERP applications. Whether these newly deployed systems are
custom or packaged, like Siebel or Clarify(Nortel), application integration
enhances their value by extending their reach to a wide variety of host based
systems. Application integration provides a company with substantial bottom-line
benefits:
No disruption - because no changes to the host legacy application are
required.
Extension - because valuable existing business logic is leveraged
and extended.
Scalability - may be deployed on multiple, connected servers to
support very large networks.
Security - may be integrated with standard firewalls, and can
leverage any standard security schemes (e.g., Secured
Sockets Layer) Web clients may utilize.
Costs - has been architected so that the services that access
the host data, the clients which present data to the
end-user, and the database of host screens are all
separate entities. This minimizes coding time, both
initially and in later changes, cutting developing
and maintenance costs.
-5-
<PAGE>
Reflection - Converting a host application's screen for the
purpose of improving the user interface.
Simplification - Uses only the necessary fields from a complicated
screen (or can stretch out a busy host screen over
several pages), resulting in simpler, easier to use
applications.
Re-purposing - Uses existing information from hosts or databases for
a new purpose by presenting it differently or in a
different context.
Dynamic Combination - Combining one or more host application(s) or
database(s) into one single application
Migration - Provide an interface to a legacy application and the
ability to migrate the information while keeping the
user interface the same.
Single View - Present the user with one view of information that
exists in multiple locations (e.g., master inventory
of merchandise in three remote locations).
Market Opportunity
Systems Modernization
Based on published data from DEC and related industry analysts, the
Company estimates that there were in excess of 600,000 VMS systems installed at
over 60,000 sites. Figures from COMPAQ suggest that over 450,000 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 VMS Legacy Systems. For this reason, UNIX platforms
are gaining substantial market share in DEC's traditional markets, including the
manufacturing, engineering and scientific industry segments. The Company's
migration software products are designed to meet the needs of those industry
segments wishing to convert their existing software and data from VMS systems to
UNIX systems. The Company has available a version of its MIGR8 conversion tools,
which provides a conversion tool set for conversion from VMS systems to UNIX,
Linux, and NT systems.
In addition to direct sales to Fortune 1000 end users, third-party
software application solution providers, driven by market demand to offer their
solutions on UNIX and NT operating systems, have used the Company's tools to
convert their old VMS software applications to the new environments. For
example, Union Carbide and EDS resell software applications that embed Accelr8's
conversion software.
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 COMPAQ, HP, IBM and SUN,
-6-
<PAGE>
include the Company's products in their materials for UNIX systems. COMPAQ 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.
Conversion to UNIX, Linux, and/or NT environments has enabled many
organizations to reduce maintenance costs, provide universal access to critical
data and have choices in COTS applications. The Company's products and services
allow organizations to adopt these new technologies and fix old problems without
abandoning enormous investments in Legacy Systems.
e-Business Access to Legacy Environments
With increased pressure on established companies to get their
businesses operating with distributable e-Commerce interfaces, Java
client-server systems have stepped in to provide the mechanism for Intranet and
Internet application interfaces. While this works for new applications, the
programming efforts grow dramatically for legacy applications, especially those
that use proprietary data files instead of SQL databases. The Company's XML
offerings for Legacy systems provide data access capabilities to extend Legacy
applications, making them available to meet e-Business, Business-to-Business and
internal data exchange strategies.
Business Strategy
The Company's objective is to enhance its position as a provider of
integrated solutions that meet the modernization needs of users through either
the migration option or providing e-Commerce access to legacy systems. Key
elements of the Company's strategy include:
Develop New Line of Business in Support of e-Commerce Market. The
Company intends to develop a new line of business helping enterprises integrate
their Legacy Systems with the Internet, Intranet, e-Commerce and
Business-to-Business strategies. Included as part of this business are XML tools
to access Legacy data, as well as a set of comprehensive services including data
analysis, data replication and application integration.
Commercialization of the Company's Open Evalu8 Tool Set. The Company
intends to continue to add to its software analysis tools which will allow
existing and new customers to assess their modernization requirements, including
the adaptability of legacy applications to E-Business implementations.
Continue Emphasis on Consulting Services in Support of UNIX, Linux, and
NT Conversion Sales. The Company intends to continue to emphasize the sale of
its integrated consulting services in conjunction with its suite of software
tools.
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 Legacy Systems as well as other
information technology environments. Management believes that the successful
-7-
<PAGE>
development of complementary products and services will allow the Company to
leverage its products and services into new and significantly larger markets.
The Company has completed development of an implementation of XML for C-ISAM The
Company is also developing an application integration service offering.
Outsourcing. The Company intends to position its software so that it
may be licensed by large outsourcing providers such as Lockheed Martin Corp.,
EDS, SAIC, Logicon, Inc., Northrop Grumman and Raytheon thereby increasing the
Company's 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 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 1999 and 2000
revenues derived from international clients totaled approximately $399,400 and
$65,028, respectively. The Company's international clients have included
DaimlerChrysler, Renault V.I., Compagnie Financiere and Alcatel. The Company
intends to continue to expand its international marketing activities to increase
its market penetration in Europe and Asia through advertising and reseller
support.
Secure Additional Consulting Projects. In the course of performing
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, Linux or NT conversion needs, as well as making legacy data available to
support Internet and Intranet applications. 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 VMS systems currently in operation. Large
corporations and government agencies generally operate these systems. 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 continues to evaluate opportunities for growth or
expansion of its business through investment in or acquisition of complementary
businesses, current or emerging technologies or product lines. Management
believes that opportunities to expand will be available to the Company and
-8-
<PAGE>
intends to investigate opportunities that are consistent with the Company's
goals and its expertise.
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 trained and experienced personnel. 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 experienced in both the VMS and the UNIX and
NT environments. The Company's personnel use the Company's tools that
automatically identify and diagnose difficult areas in modernizing an
application. This enables them to implement conversion techniques that ensure
successful converting and/or porting, as well as making legacy data available to
Internet applications. The Company offers the following services:
1) Application integration: The Company's consultants can help
customers define extensions to their legacy applications that
will improve their business operations. Some of these
extensions include: Reflection - Converting a host
application's screen for the purpose of improving the user
interface. Simplification - Uses only the necessary fields
from a complicated screen (or can stretch out a busy host
screen over several pages), resulting in simpler, easier to
use applications. Re-purposing - Uses existing information
from hosts or databases for a new purpose by presenting it
differently or in a different context. Dynamic Combination -
Combining one or more host application(s) or database(s) into
one single application. Migration - Provide an interface to a
legacy application and the ability to migrate the information
while keeping the user interface the same. Single View -
Present the user with one view of information that exists in
multiple locations (e.g., master inventory of merchandise in
three remote locations).
2) Data Replication Services: In support of a Data Replication
initiative the Company can develop custom drivers that could
perform a variety of specialized tasks. For example, a driver
could regularly query a legacy application and move the
requested data to an XML friendly relational database. Another
application might be to move all of the existing legacy
formatted data into an XML friendly relational database as a
part of an abandonment plan.
-9-
<PAGE>
3) Business-to-Business Integration: B2B is the business
analysis, legacy application Internet enablement, and
e-Commerce pipeline integration service the Company can
provide as a B2B solution package. The Company's software
developers can build the custom components needed to address
specific requirements.
4) Application Design & Development: The Company's field
engineering staff can design and develop Java-based
applications to interface XML data to EDI systems, duplicate
legacy application algorithms for web enablement, and any
other custom requirements required to support intranet, or
extranet real-time reporting, or presentation involving legacy
data integration.
5) Legacy Renewal: This custom service offering, supported where
appropriate with the Company's application conversion tools,
is designed to help enterprises meet the requirements of the
rapidly emerging e-Economy.
6) XML for RMS and XML for C-ISAM Installation and Training: The
Company's field engineering staff will provide installation,
data analysis, setup, and XML query construction services.
7) Open Evalu8 Services: The Company's personnel use automated
software tools and their expertise to evaluate a company's
code on site and deliver a report that will detail: the user
interfaces, third party software dependencies, special device
dependencies, reliability issues, input and output processing,
network interfaces and protocols, operating system and file
system dependencies, data organization (within files and/or
database management systems), programming languages, security
issues, performance issues, file management and number of
lines of code. Open Evalu8 Services are for companies that
seek to understand the resource allocation and cost of
migrating an entire software application or applications. Open
Evalu8 Services enhances Accelr8's earlier "Situational
Analysis" service.
8) Implementation Planning/Consulting: 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.
9) 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, Linux,
and/or NT. 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.
-10-
<PAGE>
10) Implementation Assistance: In addition to industry standard
support and update contracts, the Company offers both on-site
and off-site porting assistance agreements.
11) VAX/VMS to Alpha VMS/Conversion: Analysis of requirements and
production of a plan for converting from VAX/VMS to Alpha/VMS
operating systems.
12) Custom Programming: Programming is done on either a fixed
price or time and materials basis for the purpose of
re-engineering and modernizing Legacy Code or for porting
custom applications that run in front of or after COTS
applications.
13) Training: Including VMS Users Introduction to UNIX and
Application Conversion.
The Company provides its services to each client using any of the
following three methods, designed to meet the specific project requirements of
the customer.
On-site Services. Company technicians at the client's
facilities perform analysis and implementation services.
Factory Services. Company technicians at the Company's
facilities in Denver, Colorado can analyze and convert data and code.
Corporate Licenses. Large organizations that have decided to
complete a portion of the work internally or through a value added
reseller may purchase a corporate license. Pricing is determined after
an assessment of the amount of code that will be processed over the
course of the conversion.
Products
COMPAQ/DEC Legacy System Modernization. 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 an offering called "Open Evalu8 Services",
that quickly and accurately examines large quantities of legacy code, and
informs a customer of: user interfaces, third party software dependencies,
special device dependencies, reliability issues, input and output processing,
network interfaces and protocols, operating system and file system dependencies,
data organization (within files and/or database management systems), programming
languages, security issues, performance issues, file management and number of
-11-
<PAGE>
lines of code. The resulting report assists a company in determining budget and
resource allocation for porting its legacy software. Open Evalu8 will assist
those companies that desire to plan their code conversion internally.
When the decision is made to "port" or "re-host" an application, the
Company's conversion process relies on Company owned and developed tools to
provide a level of "transparency" to VMS, NT, UNIX, and Linux users, thus
preserving user productivity while accessing the higher power/lower cost of
UNIX, Linux and NT. Additionally, the conversion tools support users as they
learn the new systems at their own pace and enable large batch jobs to be moved
to the new, faster platforms, thereby freeing up the VAX to perform other tasks
more efficiently.
Other Company software features include the ability to share
information between UNIX, Linux, NT, and 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
are individually described.
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.
The Company's conversion products--Open MIGR8, 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.
-12-
<PAGE>
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/Linux/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 and NT (TPU, EDT, WPS modes)
Open JBC...... VMS batch
-------------------------------------------------
Porting Tools. are designed to move and support the running of VMS legacy
code applications in UNIX, Linux, 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
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...... Equivalent of VMS I/O calls. (sold with LIBR8)
Open SMG...... VAX compatible Screen Management facility for Unix and Linux
FMS........... FMS for UNIX, LINUX, and NT; FMS Editor (100% compatibility)
sold separately
Open DCL...... Command language interpreter; VMS-style error handling
Open MIGR8.... Bundled Porting System (user selected language support)
-------------------------------------------------
Data Management Utilities
Open TRANSL8 . . . . . Data transfer and conversions of binary files and
records
Open INTEGR8 . . . . . Remote record access system
Development Tools
Open ISAM . . . . . . .Indexed File Manager
Decision Support Tools
Evalu8 Toolset.........Modernization Requirements and Analysis
XML for RMS(TM)and XML for C-ISAM. Accelr8 's XML servers are
file access systems that will read and write to RMS or C-ISAM data files
allowing structured queries and data sharing between legacy systems and modern
-13-
<PAGE>
SQL databases and web applications across the network. With the XML servers,
users will be able to easily replicate their legacy data into ERP systems,
interface with modern EDI systems, add legacy data to B2B pipelines, and provide
clients with real-time reporting of data stored in legacy systems. The XML
servers are Java based products that run on Solaris or Windows NT.
The XML server will provide true Internet data access for applications
by translating legacy data into XML, the Internet data language. Queries will be
able to request the entire data file or any subpart of the mapped data. The XML
server will be able to view and report on all of the RMS or C-ISAM files
available in the Open customer's network. Because of their unique design, the
XML servers save developer resources. Once the data has been analyzed and
described in Accelr8's DTD, typical Internet RAD tools can be used to query and
display the data. With modern SQL databases that understand XML, the customer's
XML documents will be able to be automatically replicated into the existing SQL
database.
The Company's XML parser, used in conjunction with web clients, will
allow end-users to view, calculate, manipulate, and store data from the
organization's VAX or Alpha (VMS) legacy system and from modern systems in a
real-time interactive browser based GUI. Management believes that the higher
long-term value may be the capability of XML to replace Electronic Data
Interchange (EDI) and Electronic Contracting (EC) rigid data formats with highly
flexible XML formats that provide the same data.
With this capability working within the network, including the legacy
VMS system(s), an enterprise can enable web browser applications to have access
to the data needed to run the business over both the Intranet and Internet. This
access is not limited to the data from one application; this server can provide
data from all of the applications that operate within the business. Business
users will be able to take the data that the XML Server supplies from the
manufacturing, inventory, customer service, and sales systems and integrate that
information with the information in web-friendly financial and accounting
packages running on Unix, Linux or NT. A single web application can combine any
piece or all of this information on a screen to allow fully informed
decision-making or support B2B data/order exchange from a single site.
Customers
The Company's software migration and/or Year 2000 tools have been sold
to over 900 customers, including installation in over 100 US Department of
Defense sites. The Company's customers are principally users of VMS Legacy
Systems that are either commercial enterprises or government or quasi-government
agencies. During fiscal 2000, two customers accounted for approximately 24% of
the Company's revenues (approximately 13% and 11%, respectively). Set forth
below is a partial list of customers who have purchased products and/or services
from the Company.
-14-
<PAGE>
US Commercial Clients International Commercial Clients US Gov't. Clients
--------------------- -------------------------------- ----------------
Arco Refinery DaimlerChrysler Bureau of Census
The Boeing Co. Fidia S.P.A. Commerce Dept.
Chase Manhattan Bank Inmarset Limited Dept. of Energy
Citibank Corp. Sumitomo Heavy Industries NASA
COMPAQ Japan Atomic Energy NSA
Corning, Inc. JG Summit Petrochemical US Army
Delta Air Lines, Inc. Meidensha Electric US Navy
Dillon Companies Renault
Dow Chemical Ricoh
Electronic Data Systems SAIC
Eli Lilly Sony
Ford Motor Company Sumitomo Heavy Industries
Genentech Unisys
Honeywell Yamatake Corporation
Intel
Kellogg Co.
Kroger Co.
Lockheed Martin Corp.
Lordacs, Inc.
LTV Steel
Maher Terminals
McDonnell Douglas.
MCI
Merrill Lynch
Nils Publishing
Northrop Grumman Corp.
Procter & Gambel
Raytheon Systems Company
Rite Aid Corporation
RJ Reynolds
The Gap
TRW
Union Carbide Corp.
Union Carbide Corporation, EDS, TRW, and Lordacs have embedded the
Company's software in their UNIX solutions, yielding the potential for recurring
run-time license fees for the Company.
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
-15-
<PAGE>
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, vendor sponsored seminars,
press releases, speaking engagements and independent software vendor catalog
listings in its marketing efforts. The Company has also initiated a quarterly
newsletter for its customers. Management intends to continue its marketing
efforts toward further market penetration in international markets, with its
primary emphasis upon Europe and Asia through advertising and reseller support.
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.
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 does not believe that, for the foreseeable future, the
Company's products will be subject to any significant fluctuations in supply
costs. Components and systems used to develop products and the actual media 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 it receives.
Competition
Management is aware of two companies that compete directly with the
Company with respect to its conversion/migration products. Advanced Systems
Concepts of New Jersey has a product available that directly competes with the
Company's Open DCL product for NT. 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 COMPAQ does not
offer its own products for conversion from its VMS Legacy Systems to UNIX,
should COMPAQ 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
-16-
<PAGE>
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
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 14 employees at its facilities in Denver, Colorado,
including five employees in sales and marketing and administrative positions
with the balance in engineering and development. The Company anticipates hiring
additional employees to staff its modernization consultant teams. 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
-17-
<PAGE>
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
several of its key employees, including Thomas V. Geimer, Harry J. Fleury, and
Franz Huber, 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. Although the Company has entered into employment agreements with
certain members of it senior management team, there can be no assurance that
these individuals will remain in the employ of the Company. 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.
Dependence on Conversion of DEC VMS Legacy Systems. The Company's other
software products and services are designed for conversion from VMS Legacy
Systems to UNIX, Linux, and NT open client/server environments. Future revenues
from this line of business are dependent upon users of VMS Legacy Systems
electing to convert their data and applications to UNIX, Linux, and NT
environments. To the extent that users of VMS Legacy Systems elect to abandon
their VMS applications and data and to re-write their information technology
systems entirely in UNIX, Linux, 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 has 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 2000 and 1999, two customers
accounted for an aggregate of 24% and 28% of the Company's revenues,
respectively. 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
-18-
<PAGE>
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.
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; and Trading
Market. 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
-19-
<PAGE>
future. Investors are cautioned that the trading price of the Company's common
stock has been below the $1.00 per share minimum price required for continued
listing on the NASDAQ National Market System and the market value of the public
float has also been below the minimum $5,000,000 amount required for continued
listing on the NASDAQ National Market System. If the Company fails to satisfy
these criteria for a minimum of ten (10) consecutive trading days before
November 19, 2000, the Company's common stock will be delisted from the NASDAQ
National Market System, which could have a material and adverse effect upon the
ability of the Company's stockholders to sell their stock.
Control by Management. At July 31, 2000, the officers, directors and
key employees of the Company owned of record approximately 1,301,350 or 16.8% of
the outstanding shares of Common Stock. If they exercise all of the options that
they currently hold, they will own 1,871,350 shares of the Company's Common
Stock or 22.5% of the Company's then 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.
Shares Eligible for Future Sale. As of July 31, 2000, the Company had
reserved 1,475,000 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 1,036,000 shares were outstanding as of July 31, 2000 ("Plan
Options"). An aggregate of 335,000 of the Plan Options are exercisable at $0.36
per share; 150,000 Plan Options are exercisable at $1.50 - $7.25 per share, and
551,000 Plan Options are exercisable at $1.50 - $12.00 per share. The 1,140,000
warrants exercised by Mr. Geimer ("Geimer Warrants") were exercised at $0.24 per
share on October 14, 1997, 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 2 to the Financial Statements for further information. Sales
of Common Stock underlying Plan Options 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 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
-20-
<PAGE>
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 in this Report, the business and operation of the Company
are subject to substantial risks that 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.
GLOSSARY OF TERMS
B2B Business-to-Business
C-ISAM C-ISAM (Indexed Sequential Access Method) is a
library of C functions developed by Informix. It
allows the management of indexed sequential files
(file creation, and insert, delete and read
operations). C-ISAM includes other features like file
locking and transaction support which ensure data
integrity. These features guarantee that data is
accessible, valid and correctly used. C-ISAM uses
data types similar to those used in C. Since C-ISAM
implements these types independently of the UNIX
system used, the way it stores the data can be
different than the way the data is represented at run
time. C-ISAM includes conversion functions to convert
run-time data formats to storage data formats.
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.
COMPAQ Acronym for "Compaq Computer Corporation."
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).
CRM Acronym for "Customer Relations Management."
-21-
<PAGE>
DEC Acronym for "Digital Equipment Corporation."
DTD Data Type Definition.
ERP Acronym for "Enterprise Resource Planning."
GUI Acronym for "Graphical User Interface."
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.
LINUX Refers to a version of the UNIX operating system.
MVS Refers to Multiple Virtual Storage, and is the name
of the proprietary multi-user, multi-tasking, virtual
memory system provided by IBM with certain of its
mainframe computers.
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.
-22-
<PAGE>
Operating System The software that schedules tasks, allocates storage,
handles the interface to hardware and presents a
default interface to the user when no application
program is running.
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.
RAD Acronym for "Rapid Application Development."
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."
RMS Acronym for "Record Management System."
SQL Acronym for "Structured Query Language."
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 Report, 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.
-23-
<PAGE>
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.
XML Extensible mark-up language.
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 13,380 square feet of office
and research facility space at 303 E. 17th Avenue, Suite 108, Denver, Colorado
80203, at a monthly rental of approximately $11,708. The lease expires on
December 31, 2000.
Item 3 - Legal Proceedings
--------------------------
The Company is a party to certain legal proceedings, the outcome of
which management believes will not have a significant impact upon the financial
position of the Company.
The Company is not able to predict the outcome of the litigation
described below with any degree of certainty, and there can be no assurance that
the resolution of one or more of the cases described below may not have a
material adverse effect on the Company.
On November 16, 1999, the United States Securities and Exchange
Commission ("SEC") filed suit in the United States District Court for the
District of Colorado against Accelr8 Technology Corporation, Thomas V. Geimer,
Harry J. Fleury, and James Godkin. The SEC seeks an injunction permanently
restraining and enjoining each Defendant from violating Section 10(b) of the
Securities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder; Section
13(a) of the Securities Exchange Act of 1934, and Rules 12b-20, 13a-1, and
13a-13 promulgated thereunder; and that Mr. Geimer and Mr. Godkin be enjoined
from future violations of Section 13(b)(2) of the Securities Exchange Act of
1934. No civil penalty is sought against Accelr8. An unspecified civil penalty
in an amount to be determined by the Court is sought against Messrs. Geimer,
Fleury, and Godkin. The SEC alleges that the defendants made material
misrepresentations of fact regarding the capability of certain of the Company's
products, and the Company's financial condition, including its revenues and
earnings. The SEC also alleges that Mr. Geimer and Mr. Godkin failed to
implement, or circumvented, a system of internal accounting controls, falsified
books and records, and made misrepresentations to the Company's accountants. The
Company and the individual defendants have moved for summary judgment on the
alleged violations of Section 10(b) of the Securities Exchange Act of 1934, and
Rule 10b-5 thereunder. A hearing on the Motion for Summary Judgment is scheduled
-24-
<PAGE>
for January 9, 2001. No trial date has been set. Accelr8 and the individual
defendants believe that they have substantial defenses to the violations
alleged. However, there are no assurances that the resolution of this case will
not have a material adverse effect on the Company. The Company is paying the
costs of its own defense, as well as the costs of defense of the individual
defendants under its indemnification obligations. These costs may be material to
the Company.
On May 4, 2000, Harley Meyer filed in the United States District Court
for the District of Colorado a putative class action against Accelr8 Technology
Corporation, Thomas V. Geimer and Harry J. Fleury. On June 2, 2000, Charles
Germer filed in the United States District Court for the District of Colorado a
putative class action against Accelr8 Technology Corporation, Thomas V. Geimer
and Harry J. Fleury. On June 8, 2000, William Blais filed in the United States
District Court for the District of Colorado a putative class action against
Accelr8 Technology Corporation, Thomas V. Geimer and Harry J. Fleury. On June
20, 2000, Diana Wright filed in the United States District Court for the
District of Colorado a putative class action against Accelr8 Technology
Corporation, Thomas V. Geimer and Harry J. Fleury. On August 14, 2000, Derrick
Hongerholt filed in the United States District Court for the District of
Colorado a shareholder derivative action against Thomas V. Geimer, David C.
Wilhelm, A. Alexander Arnold III, Harry J. Fleury, James Godkin and Accelr8
Technology Corporation as a nominal defendant. These actions have been
consolidated. On October 16, 2000, a Consolidated Amended Class Action Complaint
was filed which adds James Godkin as a defendant. The Consolidated Amended
Complaint alleges violations of Section 10(b) of the Securities Exchange Act of
1934, and Rule 10b-5 thereunder, essentially making the same allegations as were
made by the SEC. The Defendants have not yet responded to that Amended
Complaint. On October 23, 2000, a Motion for Class Certification was filed. The
Defendants have not yet responded to that motion. Accelr8, Mr. Geimer, Mr.
Fleury and Mr. Godkin have answered the Hongerholt derivative complaint, and
have denied all claims. Accelr8 believes it has substantial defenses to these
claims, but there are no assurances that the resolution of these actions will
not have a material adverse effect on the Company. The consolidated putative
class actions, including the Hongerholt derivative action, have not been set for
trial. The Company is paying the costs of its own defense, as well as the costs
of defense of the individual defendants under its indemnification obligations.
These costs may be material to the Company.
On May 24, 2000, William Dews, an alleged shareholder of Accelr8, filed
a derivative action on behalf of Accelr8, against Thomas Geimer, Alexander
Arnold and David Wilhelm. This action alleges various breaches of fiduciary duty
arising out of the activities alleged by the Securities and Exchange Commission,
as well as the Company's determination to defend against the SEC's allegations.
Mr. Geimer filed a Motion to Dismiss this action, which Motion was denied.
Thereafter, Mr. Geimer filed an answer denying the claims. Mr. Wilhelm and Mr.
Arnold have also filed Motions to Dismiss, which motions are still pending.
Although no claims are asserted against Accelr8 in this action, Accelr8 is
bearing the cost of defense in accordance with indemnification agreements with
Mr. Geimer, Mr. Wilhelm, and Mr. Arnold. These costs may be material to the
Company.
On July 14, 2000, the Agricultural Excess and Surplus Insurance
Company, which is the carrier of Accelr8's director and officer liability
policy, filed in the United States District Court for the District of Colorado
-25-
<PAGE>
an action for a declaratory judgment seeking to rescind Accelr8's directors and
officers liability policy. The insurance company alleges that it was
fraudulently induced to enter into the contract of insurance because of claimed
knowing material misrepresentations about the capabilities of certain of the
Company's products made in the Company's Form 10-K filed with the SEC. Accelr8
has moved to dismiss the Complaint, which motion is still pending. Although
Accelr8 believes the insurance company's claim to be not well-founded, there is
no assurance that the resolution of this case will not have a materially adverse
effect on the Company.
In August, 1998, and thereafter, Defendants John R. Kuney, Albert
Wallace and Diana Wallace posted defamatory statements on various investment
service "message boards" relating to the Company on the internet, which is the
subject of the matter of the Company's claims against those parties. The Company
filed suit against various unnamed parties in the District Court, City and
County of Denver, State of Colorado (Case No. 99 CV 7818), and as a result of
discovery was able to determine the identities of the parties who had posted the
defamatory statements and to amend the Company's complaint to specifically name
these parties as defendants. Defendant Albert Wallace filed counterclaims
against the Company for retaliatory discharge, wrongful discharge, and for
luring, and for abuse of process. Defendant Diana Wallace also filed a
counterclaim for abuse of process. A bi-furcated trial of this matter currently
is set as follows: Lawsuit against John R. Kuney set for a three-day trial
beginning March 12, 2001. A two-week trial set for the lawsuit against Albert R.
Wallace and Diana Wallace beginning on May 14, 2001. The parties are engaged in
pre-trial discovery. The Company is pursuing prosecution of its claims and
defending the counterclaims filed against it. Management believes that it has
substantial defenses to the counterclaims brought against the Company; however,
there can be no assurance that resolution of these cases will not have a
material adverse effect on the Company. The Company is paying the costs of this
litigation, as well as the costs of defense of the counterclaims under its
indemnification obligations. These costs may be material to the Company.
Item 4 - Submission of Matters to a Vote of Security Holders
------------------------------------------------------------
On July 31, 2000, the Company held its annual meeting of shareholders.
At that meeting the shareholders of the Company elected Thomas V. Geimer,
Alexander A. Arnold, III, and David Wilhelm to the Board of Directors, and
ratified the selection of Levine Hughes & Mithuen as the Company's independent
auditors.
PART II
-------
Item 5 - Market For Common Equity and Related Stockholder Matters
-----------------------------------------------------------------
From November 19, 1996, until November 17, 1999, the Company's Common
Stock traded on the NASDAQ National Market under the symbol "ACLY." Prior to
November 19, 1996, the Common Stock was traded in the over-the-counter market on
the NASDAQ Electronic Bulletin Board. On November 17, 1999, the NASDAQ Stock
Market suspended the Company's common stock from trading. On January 5, 2000,
-26-
<PAGE>
the Company participated in a hearing before a NASDAQ Listings Panel (the
"Initial Hearings Panel") to determine if the Company's common stock could
continue to be included on the NASDAQ National Market System ("NMS") and traded
thereon. On February 18, 2000, the NASDAQ Hearings Panel decided to permit the
Company's common stock to begin trading again on NMS if certain conditions are
met, including but not limited to: (i) the Company filing its delinquent reports
with the Securities and Exchange Commission for the fiscal year ended July 31,
1999, and the quarters ended October 31, 1999, and January 31, 2000 with the SEC
on or before March 15, 2000, including financial statements audited by its new
independent auditor as of and for the fiscal years ended July 31, 1997, 1998,
and 2000; (ii) no material restatement occurring with respect to the audited
financial statements being filed with the SEC; and (iii) filing future reports
with the SEC on a timely basis. The Company met these conditions; however, the
NASDAQ Listing and Hearing Review Council ("Review Council") notified the
Company that the Review Council had decided to review the decision of the
Initial Hearings Panel. The Company submitted additional information to the
Review Council and on June 20, 2000, the Review Council withdrew its call for
review of the February 18, 2000, decision of the Initial Hearing Panel. The
Company's common stock began trading again on June 26, 2000. Between June 26,
2000, and August 22, 2000, the Company's common stock traded below the minimum
bid price requirement of $1.00 per share, and the Company failed to satisfy the
$5,000,000 public float requirement. On August 22, 2000, NASDAQ notified the
Company that the decision of the Initial Hearings Panel was being modified to
permit the Company to evidence compliance with the NASDAQ requirements for
continued listing if the Company evidenced a closing bid price and a market
value of public float of at least $1.00 per share and $5,000,000, respectively,
for a minimum of ten consecutive trading days between that date and November 19,
2000. As of October 31, 2000, the Company had not met these requirement, and
there can be no assurance that it will meet them. If the Company does not meet
these requirements, its common stock will be delisted from the NMS. If delisting
occurs, management believes that the Company's common stock will trade on other
over-the-counter markets.
The table set forth below presents the range, on a quarterly basis, of
high and low sales prices per share of Common Stock as reported by NASDAQ. 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 quarter ended October 31, 1996 present high and low bid
prices as reported by the National Quotation Bureau, Inc.
Quarter Ended High Low
------------- ---- ---
Fiscal 1999
October 31, 1998 6.250 2.125
January 31, 1999 7.438 2.500
April 30, 1999 5.375 2.625
July 31, 1999 3.188 2.000
-27-
<PAGE>
Fiscal 2000
October 31, 1999 2.375 1.125
January 31, 2000 (1) 1.875 1.125
April 30, 2000 (1) -- --
July 31, 2000 (1) 1.125 .313
(1) Trading of the Company's common stock was suspended by the NASDAQ stock
market between the dates November 17, 1999 and June 26, 2000.
The Company had approximately 115 shareholders of record as of July 31,
2000, which does not include shareholders whose shares are held in street or
nominee names. Management of the Company believes that there are over 2,000
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.
-28-
<PAGE>
Item 6 - Management's Discussion and Analysis of Financial Condition and Results
--------------------------------------------------------------------------------
of Operations
-------------
Overview
The Company began to develop software conversion tools for VMS users to
convert to UNIX environments in 1987. The Company's total revenues decreased
from $2,897,984 in fiscal 1999 to $1,567,389 in fiscal 2000. Loss before income
tax decreased from a profit of $39,052 in fiscal 1999 to a loss of ($1,455,998))
in fiscal 2000, while net income decreased from a profit of $70,432 in fiscal
1999 to a loss of ($922,536) in fiscal 2000. The decline in revenues and net
income from the previous fiscal year reflects the broad Y2K industry trend of
slowing project starts and declining volumes of code being assessed, and less
reliance on commercially developed Y2K tool sets.
During the past fiscal year the Company's sales of migration software
tools and services were negatively impacted because many IT organizations simply
"locked down" their computer environments, thus minimizing business
interruptions caused by the introduction of new software into a "stabilized"
environment. Additionally, most organizations have postponed software
modernization projects until after Y2K problems have been quantified and fixed.
The Company is aware of at least two large federal government
modernization projects that should commence by the third quarter of 2000. The
federal directive calling for a "common operating environment" by 2002 is
driving these initiatives. The Company anticipates supporting both of these
projects directly or as a sub-contractor to major system integrators.
The Company's migration expertise has been packaged in a new services
offering called Evalu8 that provides companies with assessment and planning for
modernization of legacy applications in transition to new operating systems that
feature e-commerce and Internet interoperability. At least one major hardware
vendor has requested a fixed price bid for delivery of this service to a large
bank customer.
The Company believes that its new XML offerings will be of significant
interest to enterprises now seeking post Y2K integration of their Legacy systems
with e-business strategies. The Company intends to license its XML server
technology on an OEM basis to other XML tool providers.
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.
-29-
<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, 1999 and 2000 and
for each of the two years in the period ended July 31, 2000 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 provided below is not necessarily indicative of the
future results of operations or financial performance of the Company.
Year Ended July 31,
-------------------
Statement of Operations Data: 1999 2000
---- ----
Revenue:
Product license and $2,277 $1,073
customer support fees
Resale of purchased software 394 385
Consulting fees 227 109
Total revenue 2,898 1,567
Income(loss) from operations (527) (2,317)
Net income (loss) 70 (923)
Basic 7,821,855 7,767,081
Diluted 8,036,492 7,767,081
Net income(loss) per share(2)
Basic $.01 $(.12)
Diluted $.01 $(.12)
Balance Sheet Data: 1999 2000
---- ----
Working capital $10,967 $10,500
Current assets 11,658 11,123
Current liabilities 691 623
Total assets 14,073 13,106
Total liabilities 1,837 1,844
Shareholders' equity 12,236 11,262
-30-
<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:
Fiscal year ended July 31,
1999 2000
---- ----
Total revenues 100.00% 100.00%
Cost of services 40.55 92.52
Cost of software purchased for resale 1.84 5.72
General and administrative 34.43 97.44
Marketing and sales 41.36 52.15
Income from operations (18.18) (147.83)
Other income (expense), net 19.53 54.94
Income tax benefit (provision) 1.08 34.03
------ ------
Net income 2.43% (58.86)%
====== ======
Year Ended July 31, 2000 Compared to Year Ended July 31, 1999
Total revenues for the year ended July 31, 2000, were $1,567,389 a
decrease of $1,330,595 or 45.9% as compared to the year ended July 31, 1999.
Consulting fees for the year ended July 31, 2000, were $109,363 a decrease of
$117,048 or 51.7% as compared to the year ended July 31, 1999, and represented
7.0% of total revenues. Product license and customer support fees for the year
ended July 31, 2000, were $1,073,124 a decrease of $1,204,142 or 52.9% as
compared to the year ended July 31, 1999, and represented 68.5% of total
revenues. The decrease in revenues from consulting fees and product licenses and
customer support fees was largely the result of a general decline in market
demand for year 2000 tools and Year 2000 code processing and services that
provide training on sales of Year 2000 tools at 1999 calendar year end.
Management believes most companies had already purchased the tools necessary to
help remediate any Year 2000 problems prior to August 1, 1999. In addition,
management believes that revenues from the sale of migration tools and services
were negatively impacted by a "lockdown" by most Information Technology
environments in preparation for Year 2000 change over of software applications
which continued into 2000 until companies were certain that all Year 2000
problems were in fact corrected. Management believes companies are now beginning
to have an interest in software modernization and new products being offered for
legacy integration with E-business strategies. Also, the previous period
included a substantial one-time maintenance income item related to a Year 2000
license. Revenues from the resale of purchased software for the year ended July
31, 2000, were $384,902 a decrease of $9,405 or 2.4% as compared to the year
ended July 31, 1999, and represented 24.6% of total revenues.
During the year ended July 31, 2000, revenues from the Company's two
largest customers were $202,953 and $170,205 representing 13.2% and 11.0% of
total revenues. In comparison, revenues from two customers were $479,983 and
$333,220 representing 16.7% and 11.6% of the total revenue for the year ended
July 31, 1999. The loss of a major customer could have a significant impact on
the Company's financial performance in any given year.
-31-
<PAGE>
Cost of services for the year ended July 31, 2000, was $1,450,176 an
increase of $274,983 or 23.4% as compared to the year ended July 31, 1999. Cost
of services as a percentage of revenues from both consulting fees and product
license and customer support fees increased from 46.9% for the year ended July
31, 1999, to 122.7% for the year ended July 31, 2000. This increase occurred
principally because revenues decreased 52.8% due to the decrease in Year 2000
code processing and services that provide training on sales of Year 2000 tools
plus increased amortization of software costs capitalized and a decreased amount
of engineering salaries being capitalized as software development costs.
Cost of software purchased for resale for the year ended July 31, 2000,
was $89,632 an increase of $36,194 or 67.7% as compared to the year ended July
31, 1999. The increase in software purchased for resale results from variations
in the product mix of items sold, and a reduction of cost in the previous year
due to accumulated overcharges in the past.
General and administrative expenses for the year ended July 31, 2000,
were $1,527,304 an increase of $529,474 or 53.1% as compared to the year ended
July 31, 1999. This increase was primarily due to increases in professional fees
and general insurance as a result of the action by the SEC plus the increase in
market value of investments in the deferred compensation trust which is
recognized as deferred salary. Payroll taxes and employee insurance decreased
due to fewer employees during the period plus a decrease in general corporate
expenses.
Marketing and sales expenses for the year ended July 31, 2000 was
$817,354 a decrease of $381,059 or 31.8% as compared to the year ended July 31,
1999. This decrease resulted from decreased advertising, promotional material,
attendance at trade shows, salaries, travel and related marketing expense
partially offset by increased commissions paid to non-employees. These changes
were the result of decreased market activity due to lack of Year 2000 tool and
consulting sales plus a soft migration market due to time and attention that
customers were devoting to Year 2000 issues.
As a result of these factors, loss from operations for the year ended
July 31, 2000, was $2,317,077 an increase of $1,790,187 or 340% as compared to
loss from operations of $526,890 in the year ended July 31, 1999.
Interest income for the year ended July 31, 2000, was $581,938 an
increase of 18.1% as compared to the year ended July 31, 1999. This increase was
primarily due to interest rate increase during the year.
Realized gain on marketable securities held in the deferred
compensation trust for the year ended July 31, 2000 was $37,278 an increase of
97.1% as compared to the year ended July 31, 1999. This gain was the result of
selling trust investments. Unrealized gain on marketable securities held in the
deferred compensation trust for the year ended July 31, 2000 was $242,598 an
increase of 349% as compared to the year ended July 31, 1999. This gain was the
result of changing market values of securities held by the trust.
-32-
<PAGE>
Other miscellaneous income and expense for the year ended July 31, 2000
resulted in an increased expense of $735 as compared to the year ended July 31,
1999.
Income tax benefit for the year ended July 31, 2000 was $533,462 an
increase of 1,600% as compared to the year ended July 31, 1999. The increase in
tax benefit is the result of carrying back the current year tax loss to fiscal
year 1998 for a tax refund plus changes in deferred tax assets and liabilities.
As a result of these factors net loss for the year ended July 31, 2000,
was, $922,536 an increase of $992,968 or 1,410% as compared to the year ended
July 31, 1999.
Capital Resources and Liquidity
At July 31, 2000, as compared to July 31, 1999, the Company's current
assets decreased 4.6% from $11,658,167 to $11,123,156 and the Company's
liquidity, as measured by cash and cash equivalents, increased by 1.0% from
$10,257,175 to $10,359,581 During the same period, shareholders' equity
decreased 8.0% from $12,235,964 to $11,262,187 as a result of the Company's net
loss and repurchase of Company stock. Management believes its current cash
balances plus anticipated cash flow from operations will be adequate to cover
its future financial needs.
Year 2000 COMPLIANCE
The Year 2000 Problem referred to existing computer programs' ability
to appropriately distinguish the year 2000 from the year 1900 when processing
transactions. The Company developed and executed a plan to achieve compliance
with Year 2000 issues that included reviewing its hardware and software that
support its operations and infrastructure, as well as its internal systems that
support the Company's administrative functions. For each of these areas, the
plan called for the Company to identify the systems, address their compliance
with the Year 2000 Problem, test their compliance and make any upgrades
considered necessary to ensure compliance. As of this date, the Company is
successfully running all of its systems and has encountered no issues or
malfunctions related to the Year 2000 Problem. No contingency plans had to be
initiated; and no additional costs were incurred.
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
--------------------
On November 22, 1999, the firm of Deloitte & Touche LLP ("DT") notified
the Company's Chief Executive Officer that the client-auditor relationship had
ceased, and that information had come to DT's attention which, had it been known
-33-
<PAGE>
to them would have affected their report issued under the date of September 15,
1998, which reported on the balance sheets of the Company as of July 31, 1998
and 1997, and the related statements of operations, shareholders' equity and
cash flows for each of the years then ended (collectively the "Financial
Statements"). DT also advised that their report dated September 15, 1998, should
no longer be relied upon or associated with the Company's balance sheets as of
July 31, 1998 and 1997 and the related statements of operations, shareholders'
equity, and cash flows for each of the years then ended. Further, DT verbally
advised the Company's Chief Executive Officer that it was unable to complete its
audit of the Company's Financial Statements for the year ended July 31, 1999,
because DT was no longer able to rely on management's representations.
In addition, DT requested that the Company immediately notify all
entities and individuals whom the Company knew to be relying upon or who were
likely to rely upon the Financial Statements and the report of DT's thereon,
that their report must no longer be relied upon or associated with the Financial
Statements. DT's report on the Company's financial statements for the fiscal
years ended July 31, 1998 and 1997 did not contain an adverse opinion or a
disclaimer of opinion and was not qualified or modified as to uncertainty, audit
scope, or accounting principles.
In connection with the audits of the Company's financial statements for
the fiscal years ended July 31, 1998 and 1997, and during the subsequent
unaudited interim periods, there were no disagreements with DT on matters of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure, which, if not resolved to the satisfaction of DT, would have
caused DT to make reference to the matter in their report.
The Company authorized DT to respond fully to any successor independent
accounting firm regarding DT's audit of the Company's financial statements, and
DT's resignation as auditors of the Company.
The Company engaged Levine Hughes & Mithuen, Inc. ("LH&M") as its new
independent accountants to audit and report on the Company's balance sheets as
of July 31, 1997, 1998, and 1999, and the related statements of income,
shareholders' equity and cash flows for each of the years in the three-year
period ended July 31, 1999. LH&M also audited the Company's financial statements
for the fiscal year ending July 31, 2000.
-34-
<PAGE>
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.
Name Age Position
---- --- --------
Directors and Executive Officers
Thomas V. Geimer 53 Secretary, Chief Financial
Officer, Chief Executive
Officer
Harry J. Fleury 53 President
David C. Wilhelm(1) 81 Director
A. Alexander Arnold III(1) 59 Director
Key Employees
Dr. Franz Huber 55 Chief Scientist
----------------------------------
(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.
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.
-35-
<PAGE>
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.
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 Committee
The Board of Directors maintains a Compensation Committee and an Audit
Committee. The members of the Compensation Committee and the Audit Committee are
Messrs. Arnold and Wilhelm, the Company's non-management directors. The
Compensation Committee did not hold any meetings during the last fiscal year.
However, the Audit Committee held six (6) meetings during the last fiscal year,
and one member of the Audit Committee met separately with the Company's former
auditors.
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 and 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, 2000, all Section 16(a) filing
requirements applicable to its directors, executive officers and 10% owners were
met.
-36-
<PAGE>
<TABLE>
<CAPTION>
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
two fiscal years ended July 31, 2000, of Thomas V. Geimer and Harry J. Fleury,
who are the Company's most highly compensated executive officers, and Timothy
Fitzpatrick, a former key employee of the Company.
Long Term
Annual Compensation Compensation
------------------- ------------
Other Securities
Name and Fiscal Annual Underlying
Principal Position Year Salary Bonus Compensation Options
------------------ ---- ------ ----- ------------ -------
<S> <C> <C> <C> <C> <C>
Thomas V. Geimer................2000 $100,500 $ 75,000(1) -- 100,000(3)
Chief Executive Officer 1999 $100,000 $ 75,000(1) $ 8,593(2) 100,000(4)
and Chief Financial
Officer
Harry J. Fleury..................2000 $ 74,823 $ 1,327(5) --
President 1999 $ 64,760 $ 14,708(5) $ -- 50,000(6)
Timothy Fitzpatrick..............2000 $ 65,400 $ 45,936(7) --
Vice President 1999 $ 65,000 $ 99,156(7) $ -- 50,000(6)
Sales and Marketing
----------------------------
(1) Represents deferred compensation for Mr. Geimer pursuant to the
Company's deferred compensation plan, $75,000 of which vested during
each of the fiscal years ended July 31, 1999 and 2000.
(2) Represents reimbursement of premium on life insurance.
(3) Represents stock options to purchase 100,000 shares at an exercise
price of $1.50 per share.
(4) Represents stock options to purchase 100,000 shares at an exercise
price of $2.50 per share.
(5) Includes sales commissions earned by Mr. Fleury on revenues from
certain international sales.
(6) Represents stock options to purchase 50,000 shares at an exercise price
of $2.50 per share, 20,000 of which had vested as of July 31, 2000 and
10,000 of which will vest on each of July 31, 2001, 2002 and 2003.
(7) Represents sales commissions earned by Mr. Fitzpatrick on revenues from
certain domestic sales.
Option Values. The following table provides certain information
concerning the fiscal year end value of unexercised options held by Mr. Fleury,
Mr. Geimer and Mr. Fitzpatrick.
-37-
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Aggregated Option Exercises in 2000 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 0 120,000 30,000 $20,300 0
Thomas V. Geimer 0 0 300,000 0 $ 0 0
Timothy Fitzpatrick 0 0 115,000 30,000 $19,285 0
------------------------------------
(1) Value calculated by determining the difference between the closing
sales price on July 31, 2000, of $.563 per share and the exercise price
of the options. Fair market value was not discounted for restricted
nature of any stock purchased on exercise of these options.
Employment Agreements
The Company has entered into employment agreements with Thomas V.
Geimer, Harry J. Fleury, James Godkin, and Franz Huber. Mr. Geimer's employment
agreement is for a two year term, is automatically renewable for one year
increments, and provides for a yearly salary of $100,000 per year with deferred
compensation of $75,000 per year. Mr. Geimer's agreement also contains
provisions under which the Company will be obligated to pay Mr. Geimer five
times his annual salary and deferred compensation in the amount of $50,000
(i.e., an aggregate of $750,000) if a change of control as defined in the
agreement occurs. The two year employment agreements for Messrs. Fleury, Godkin,
and Huber are automatically renewable for one year increments, and provide for
annual salary payments of $75,000, $58,000, and $80,000, respectively. The
employment agreements also provide for annual bonuses in the discretion of the
Company, and Mr. Fleury will be paid commissions relating to the generation of
foreign sales of the Company's products and services. The agreements for Messrs.
Fleury, Godkin, and Huber also contain provisions under which the Company will
be obligated to pay them two times their annual salary in the event that change
of control as defined in their agreements occurs.
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 $10,500. The Company may make
discretionary contributions to the plan based on recommendations from the Board
of Directors. The Company made no contribution for the fiscal years ended July
31, 1999 or 2000.
-38-
</TABLE>
<PAGE>
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, 1999 and 2000,
the Company contributed $75,000 to the plan. The $75,000 contribution for the
fiscal year ended July 31, 2000 was made September 14, 2000.
Options. 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 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 shares held for
employee benefit 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 6 to the Financial Statement for further
information.
The 1996 Stock Option Plans.
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
-39-
<PAGE>
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, 2000,
25,000 options, exercisable at $7.25, $2.50, and $1.50 per share of Common Stock
had been granted to each of Messrs. Wilhelm and Arnold pursuant to the
Non-Qualified Plan. As of July 31, 2000, a total of 551,000 options exercisable
at $1.50 to $12.00 per share of Common Stock had been granted to employees
pursuant to the Qualified Plan.
-40-
<PAGE>
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, 2000 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,
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 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) 340,300 4.22%
Harry J. Fleury(1), (3), (4) 213,750 2.71%
Dr. Franz Huber(1),(5) 101,000 1.29%
A. Alexander Arnold III(6) 1,016,000 12.97%
845 Third Ave., 6th Flr
New York, NY 10021
David C. Wilhelm(7) 301,300 3.85%
333 Logan St. Suite 100
Denver, CO 80203
Executive Officers and Directors 1,871,350 22.47%
as a Group (4 persons)
---------------------------------
(1) The address for Messrs. Geimer, Fleury, and Huber is 303 E. 17th Ave.,
#108, Denver, CO 80203.
(2) Does not include 1,140,000 shares, which were purchased by Mr. Geimer
upon exercise of 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 2 to
Financial Statements for further information. Includes 300,000 shares,
which may be purchased by Mr. Geimer upon exercise of options.
(3) Includes 120,000 shares, which may be purchased by Mr. Fleury upon
exercise of options.
(4) Does not include options to purchase 30,000 shares which are currently
not exercisable but which will vest upon the passage of time in the
future.
(5) Represents 98,000 shares, which may be acquired by Mr. Huber upon
exercise of options.
(6) Includes 800,000 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 141,000
shares held in investment advisory accounts for which Mr. Arnold serves
as the investment advisor. Also includes 75,000 shares, which may be
purchased by Mr. Arnold upon exercise of options.
(7) Includes 162,225 shares held by the Jean C. Wilhelm Trust, of which Mr.
Wilhelm and his children are the lifetime beneficiaries, and 64,075
shares held by the David C. Wilhelm Living Trust, of which Mr. Wilhelm
is the beneficiary, and 75,000 shares which may be purchased by Mr.
Wilhelm upon exercise of options.
-41-
<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, 2000, the Board of Directors had authorized
deferred compensation totaling $375,000 of which Mr. Geimer was totally vested
and $300,000 had been funded.
There were no other transactions or series of transactions for the
fiscal year ended July 31, 2000, 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, 5% 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
No exhibits are being filed with this report.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of
the fiscal year ended July 31, 2000.
-42-
<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: November 14, 2000 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: November 14, 2000 By: /s/ Thomas V. Geimer
----------------- -------------------------------------
Thomas V. Geimer, Secretary,
Chief Executive Officer and
Chief Financial Officer
Date: November 14, 2000 By: /s/ A. Alexander Arnold III
----------------- -------------------------------------
A. Alexander Arnold III
Date: November 14, 2000 By: /s/ David C. Wilhelm
----------------- -------------------------------------
David C. Wilhelm
-43-
<PAGE>
ACCELR8 TECHNOLOGY CORPORATION
FINANCIAL STATEMENTS
JULY 31, 2000 AND 1999
<PAGE>
ACCELR8 TECHNOLOGY CORPORATION
TABLE OF CONTENTS
PAGE
INDEPENDENT AUDITORS' REPORT F-1
BALANCE SHEETS F-2
STATEMENTS OF OPERATIONS F-3
STATEMENTS OF SHAREHOLDERS' EQUITY F-4
STATEMENTS OF CASH FLOWS F-5
NOTES TO FINANCIAL STATEMENTS F-6 - F-19
<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, 2000 and 1999, and the related
statements of operations, shareholders' equity, and cash flows for each of the
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of July 31, 2000
and 1999, and the results of its operations and its cash flows for each of the
years then ended, in conformity with generally accepted accounting principles.
By: /s/ Levine, Hughes & Mithuen, Inc.
-------------------------------------
Levine, Hughes & Mithuen, Inc.
Englewood, Colorado
September 15, 2000
F-1
<PAGE>
<TABLE>
<CAPTION>
ACCELR8 TECHNOLOGY CORPORATION
BALANCE SHEETS
FOR THE YEARS ENDED JULY 31, 2000 AND 1999
ASSETS
2000 1999
------------ ------------
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 10,359,581 $ 10,257,175
Accounts receivable 277,194 1,108,095
Prepaid expenses 62,253 58,023
Income taxes receivable -- 13,422
Deferred tax assets 424,128 221,452
------------ ------------
Total current assets 11,123,156 11,658,167
Property and equipment, net 180,436 258,237
Software development costs, less accumulated amortization
of $2,584,492 and $1,762,217, respectively 1,066,313 1,638,086
Investments 735,813 453,053
Other assets -- 65,000
------------ ------------
Total assets $ 13,105,718 $ 14,072,543
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 183,751 $ 223,398
Accrued liabilities 130,101 61,422
Deferred maintenance revenue 218,838 265,883
Other deferred revenue 89,937 140,000
------------ ------------
Total current liabilities 622,627 690,703
------------ ------------
Long-term liabilities:
Deferred tax liabilities 410,091 627,823
Deferred license fee revenue -- 65,000
Other long-term liabilities 810,813 453,053
------------ ------------
Total long-term liabilities 1,220,904 1,145,876
------------ ------------
Total liabilities 1,843,531 1,836,579
------------ ------------
Commitments and Contingencies (Notes 6 and 8)
Shareholders' equity:
Common stock, no par value; 11,000,000 shares
authorized; 7,758,817 and 7,794,617 shares
issued and outstanding, respectively 8,301,876 8,353,117
Contributed capital 315,049 315,049
Retained earnings 2,918,862 3,841,398
Shares held for employee benefit (1,129,110 shares at cost) (273,600) (273,600)
------------ ------------
Total shareholders' equity 11,262,187 12,235,964
------------ ------------
Total liabilities and shareholders' equity $ 13,105,718 $ 14,072,543
============ ============
See independent auditors' report
and notes to financial statements
F-2
</TABLE>
<PAGE>
ACCELR8 TECHNOLOGY CORPORATION
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JULY 31, 2000 AND 1999
2000 1999
----------- -----------
Revenues:
Consulting fees $ 109,363 $ 226,411
Product license and customer support fees 1,073,124 2,277,266
Resale of purchased software 384,902 394,307
----------- -----------
Total net revenues 1,567,389 2,897,984
----------- -----------
Costs and expenses:
Costs of services 554,379 472,661
Cost of software purchased for resale 89,632 53,438
General and administrative 1,527,304 997,830
Marketing and sales 817,354 1,198,413
Amortization 822,276 624,892
Depreciation 73,521 77,640
----------- -----------
Total costs and expenses 3,884,466 3,424,874
----------- -----------
Loss from operations (2,317,077) (526,890)
----------- -----------
Other income (expense):
Interest income 581,938 492,978
Unrealized holding gain on investments 242,598 54,051
Realized gain on sale of investments 37,278 18,913
Other expense (735) --
----------- -----------
Total other income 861,079 565,942
----------- -----------
Income (loss) before income taxes (1,455,998) 39,052
Income tax benefit 533,462 31,380
----------- -----------
Net income (loss) $ (922,536) $ 70,432
=========== ===========
Net income (loss) per share:
Basic $ (.12) $ 0.01
=========== ===========
Diluted $ (.12) $ 0.01
=========== ===========
Weighted average shares outstanding:
Basic 7,767,081 7,821,855
=========== ===========
Diluted 7,767,081 8,036,492
=========== ===========
See independent auditors' report
and notes to financial statements
F-3
<PAGE>
<TABLE>
<CAPTION>
ACCELR8 TECHNOLOGY CORPORATION
STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED JULY 31, 2000 AND 1999
Common Stock Shares Held Total
----------------------------- Contributed Retained For Employee Shareholders'
Shares Amount Capital Earnings Benefit Equity
----------- ----------- ----------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Balances, July 31, 1998 7,858,617 $ 8,543,477 $ 315,049 $ 3,770,966 $ (273,600) $12,355,892
Cost of repurchasing common
stock (64,000) (190,360) -- -- -- (190,360)
Net income -- -- -- 70,432 -- 70,432
----------- ----------- ----------- ----------- ------------ -----------
Balances, July 31, 1999 7,794,617 8,353,117 315,049 3,841,398 (273,600) 12,235,964
Cost of repurchasing common
stock (35,800) (51,241) -- -- -- (51,241)
Net loss -- -- -- (922,536) -- (922,536)
----------- ----------- ----------- ----------- ------------ -----------
Balances, July 31, 2000 7,758,817 $ 8,301,876 $ 315,049 $ 2,918,862 $ (273,600) $11,262,187
=========== =========== =========== =========== ============ ===========
See independent auditors' report
and notes to financial statements
F-4
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ACCELR8 TECHNOLOGY CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JULY 31, 2000 AND 1999
2000 1999
------------ ------------
Cash flows from operating activities:
<S> <C> <C>
Net income (loss) $ (922,536) $ 70,432
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Amortization 822,276 624,892
Depreciation 73,521 77,640
Loss from disposal of assets 10,735 --
Unrealized holding gain on investments (242,598) (54,051)
Realized gain on sale of investments, interest and
dividends reinvested (40,162) (18,913)
Deferred income tax benefit (420,408) (45,672)
Net change in assets and liabilities:
Accounts receivable 895,901 (228,403)
Prepaid expenses (4,230) 41,354
Income taxes receivable 13,422 457,198
Accounts payable (39,647) (178,775)
Accrued liabilities 68,679 (130,665)
Other deferred revenue (115,063) 205,000
Deferred maintenance revenue (47,045) 70,288
Other long-term liabilities 357,760 147,964
------------ ------------
Net cash provided by operating activities 410,605 1,038,289
------------ ------------
Cash flows from investing activities:
Software development (250,503) (912,431)
Purchase of property and equipment (6,995) (42,556)
Proceeds from sale of property and equipment 540 --
Purchase of investments -- (75,000)
------------ ------------
Net cash used in investing activities (256,958) (1,029,987)
------------ ------------
Cash flows from financing activities:
Repurchase of common stock (51,241) (190,360)
------------ ------------
Net cash used in financing activities (51,241) (190,360)
------------ ------------
Net increase (decrease) in cash and cash equivalents: 102,406 (182,058)
Cash and cash equivalents,
Beginning of year: 10,257,175 10,439,233
------------ ------------
Cash and cash equivalents,
End of year: $ 10,359,581 $ 10,257,175
============ ============
Supplemental information:
Cash received for income taxes $ (126,476) $ (442,900)
============ ============
See independent auditors' report
and notes to financial statements
F-5
</TABLE>
<PAGE>
ACCELR8 TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Nature of Business:
Accelr8 Technology Corporation ("Accelr8" or the "Company") is a
provider of software tools and consulting services for the
modernization of solutions for VMS legacy systems that were developed
by Digital Equipment Corporation ("DEC") and which are proprietary to
Compaq Corporation as a result of its purchase of DEC. The Company's
consulting services and software conversion tools enable the Company's
customers to analyze and implement conversions to UNIX, Linux and NT
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 and disclosure of contingent 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, including accounts receivable from major
customers (see Note 4). 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.
Bad Debts:
Bad debts are provided for using the allowance method based on
historical experience and ongoing evaluation of outstanding accounts
receivable. Based on the Company's collection experience, management
determined no allowance for bad debts was necessary for the years
ended July 31, 2000 and 1999.
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 other expense. 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.
Depreciation expense for the years ended July 31, 2000 and 1999 was
$73,521 and $77,640, respectively.
F-6
<PAGE>
ACCELR8 TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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 software development 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
bear 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, 2000 and 1999 was
$822,276 and $624,892, respectively. Research and development costs
charged to operations for the years ended July 31, 2000 and 1999 was
$148,498 and $0, respectively.
Long-Lived Assets:
The Company evaluates the potential impairment of long-lived assets
and long-lived assets to be disposed of in accordance with Statement
of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of". As of July 31, 2000 and 1999, management believes there
was no impairment of the Company's long-lived assets.
Revenue Recognition:
Consulting services:
-------------------
For years ended July 31, 2000 and 1999, consulting revenue is
recognized as services are performed.
Software license contracts ("SLC"):
-----------------------------------
For years ended July 31, 2000 and 1999, SLC revenue is recognized when
the Company substantially completes its obligations under the
agreement and the customer has accepted the product.
Post contract support ("PCS"):
------------------------------
For year ended July 31, 2000 and 1999, the Company recognized revenue
using either the straight-line method or ratably over the term of the
PCS agreement based upon historical evidence.
Reseller of purchased software and post contract support ("PCS"):
-----------------------------------------------------------------
For years ended July 31, 2000 and 1999, the Company periodically
functioned as a value-added reseller of computer software and bundled
PCS agreements to its customers. The Company generally recognizes
revenue upon delivery of the computer software. However, when the PCS
agreement extends over one year, the PCS revenue is recognized over
the term of agreement.
F-7
<PAGE>
ACCELR8 TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Sales returns and allowances:
-----------------------------
The Company provides for sales returns and allowances on an accrual
basis.
Effective August 1, 1998, the Company adopted the provisions of the
American Institute of Certified Public Accountants (AICPA) Statement
of Position (SOP) 97-2, "Software Revenue Recognition". SOP 97-2 has
not changed the basic rules of revenue recognition previously
contained in SOP 91-1 but does provide additional guidance,
particularly with respect to multiple deliverables and "when and if"
available products. The effect of adopting SOP 97-2 was not
significant.
Deferred Revenue:
Deferred consulting revenue represents amounts billed but not yet
earned under consulting agreements. Deferred maintenance revenue
represents amounts billed but not yet earned under maintenance
agreements. Deferred license fee revenue represents amounts billed but
not yet earned under license agreements.
An agreement dated January 30, 1998 with a major company provided for
licensing of tools and providing support for a three-year period.
Initially, lacking any historical data on this contract, the Company
began amortizing deferred maintenance revenue ratably over the
thirty-six month term. At the end of the first year of the contract,
this amortization method was modified based upon a change in estimate,
as a result of a review of the actual costs of servicing the contract
in the initial year and the then-estimated costs expected to be
incurred in future years. This review indicated approximately 85% of
the expected costs were incurred in the first contract year and,
accordingly, the amount of revenue recognized was increased by an
additional $310,000 during the year ended July 31, 1999.
Income Taxes:
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards 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.
Earnings Per Share:
During February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings Per Share". SFAS No. 128 requires companies to present basic
earnings per share and diluted earnings per share. The Company adopted
this statement in fiscal year 1998 and all earnings per share data
have been restated to reflect the new standard. For the year ended
July 31, 2000, common stock equivalents are not material and do not
affect the loss per share. Common stock equivalents, which include
stock options, are not included in the calculation of loss per share
since they are anti-dilutive.
F-8
<PAGE>
<TABLE>
<CAPTION>
ACCELR8 TECHNOLOGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Earnings Per Share: (continued)
The following table is a reconciliation of basic and diluted earnings
per share for the years ended July 31, 2000 and 1999:
2000 1999
-------------------------------------- --------------------------------------
Loss Shares Loss Income Shares Earnings
(Numerator) (Denominator) Per Share (Numerator) (Denominator) Per Share
---------- ----------- --------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net income (loss) $ (922,536) $ 70,432
========== ==========
Basic earnings (loss)
per share:
Income (loss) available
to common
shareholders $ (922,536) 7,767,081 $ (.12) $ 70,432 7,821,855 $ 0.01
========== ==========
Effect of dilutive
securities:
Stock options -- -- -- -- 214,637
---------- --------- ---------- ---------- ---------
Diluted earnings
(loss) per share $ (922,536) $7,767,081 $ (.12) $ 70,432 8,036,492 $ 0.01
=========== ========== ========== ========== ========= ==========
Advertising:
The Company expenses the costs of advertising the first time the
advertising takes place. Advertising expense was $23,685 and $107,815
for the years ended July 31, 2000 and 1999, respectively.
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 SFAS No. 123,
"Accounting for Stock Based Compensation".
Comprehensive Income:
The Company adopted SFAS No. 130, "Reporting Comprehensive Income,"
effective August 1, 1998. SFAS No. 130 establishes standards for
reporting and displaying comprehensive income and its components
(revenues, expenses, gains and losses) in a full set of general
purpose financial statements. The Company, as of July 31, 2000 and
1999, does not have any other items that would be included in
comprehensive income.
Financial Instruments:
The Company periodically maintains cash balances at a commercial bank
in excess of the Federal Deposit Insurance Corporation insurance limit
of $100,000. At July 31, 2000, the Company's uninsured cash balance
was approximately $10,100,000.
F-9
</TABLE>
<PAGE>
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Recent Accounting Pronouncements:
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use". SOP 98-1
requires computer software costs associated with internal use software
to be expensed as incurred unless certain capitalization criteria are
met. The effect of this statement does not have a material impact on
the Company's financial position or results of operations.
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5, "Reporting on the Costs of Start-Up
Activities. SOP 98-5 requires that all non-governmental entities
expense the costs of start-up activities as those costs are incurred.
The Company adopted SOP 98-5 effective August 1, 1999. The Company
does not expect the adoption of SOP 98-5 to have a material effect on
its financial position or results of operations.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities", which establishes accounting and reporting standards for
derivative instruments and hedging activities. SFAS No. 133 requires
that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. In July 1998, the FASB issued SFAS No. 137,
which delays the effective date of SFAS No. 133 to all fiscal years
beginning after July 15, 2000. The Company does not expect the
adoption of this statement to have a material effect on the Company's
financial position or results of operations.
NOTE 2 PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and are comprised of the
following at July 31:
2000 1999
---------- ----------
Computer equipment $ 392,289 $ 386,274
Furniture and fixtures 96,965 111,927
---------- ----------
Total property and equipment 489,254 498,201
Less accumulated depreciation (308,818) (239,964)
---------- ----------
Net property and equipment $ 180,436 $ 258,237
========== ==========
NOTE 3 SHAREHOLDERS' EQUITY
Stock Option Plans:
The Company has option agreements with a key executive and three
stock-based compensation plans which are discussed below:
Option and Warrant Agreement with Key Executive:
In fiscal 1998, options for the purchase of 1,129,110 shares held by
the Chairman of the Board ("Executive Options and Warrants") were
exercised and placed into a "Rabbi" Trust as discussed in Note 6. Such
shares are issuable upon the occurrence of retirement, death or
termination of the Chairman's employment over a ten-year period after
such occurrence or sooner at the Company's discretion.
F-10
<PAGE>
NOTE 3 SHAREHOLDERS' EQUITY (continued)
Option and Warrant Agreement with Key Executive: (continued)
In accordance with generally accepted accounting principles the
Company has included the assets and liabilities of the "Rabbi" Trust
in its financial statements and the shares of the Company's common
stock held by the "Rabbi" Trust have been treated as treasury stock
for financial reporting purposes.
Employee Stock Option Plan:
The Employee Stock Option Plan (the "Employee Plan") permits the grant
of non-qualified stock options to employees, officers and directors of
the Company. The exercise price of each option, which does 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 has reserved 475,000 shares of its authorized but
unissued common stock for stock options to be granted under the
Employee Plan. There are no shares which remain available under the
Employee Plan for future grants. Under the terms of the Employee Plan,
options vest at 25% annually. As of July 31, 2000, 335,000 options
have been granted and remain outstanding under the Employee Plan.
Incentive Stock Option Plan:
The Company has reserved 700,000 shares 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. Under the terms of the Incentive Plan,
options vest 100% upon grant. During fiscal 2000, the Company issued
an additional 157,000 options and 76,000 options expired under this
plan, resulting in 551,000 options being outstanding at July 31, 2000.
Non-Qualified Stock Option Plan:
The Company has reserved 300,000 shares 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
established by the Company's compensation committee on the date of
grant. Under the terms of the Non-Qualified Plan, options vest 100%
upon grant. During fiscal 2000, the Company issued an additional
50,000 options under the Non-Qualified Plan. As of July 31, 2000,
150,000 options have been granted and remain outstanding under the
Non-Qualified Plan.
Accounting For Employee Based Option Plans:
The Company accounts for employee stock-based compensation
arrangements using the intrinsic value method in accordance with APB
No. 25 and has adopted the disclosure-only provisions of SFAS No. 123.
Accordingly, no compensation expense has been recognized for options
issued in conjunction with the stock option agreements and stock-based
compensation plans discussed above.
F-11
<PAGE>
<TABLE>
<CAPTION>
NOTE 3 SHAREHOLDERS' EQUITY (continued)
Accounting For Employee Based Option Plans: (continued)
Had compensation cost been determined based upon the fair value at the
grant date under these agreements consistent with SFAS No. 123, the
Company's fiscal 2000 and 1999 net income and earnings per share
amounts would have been reduced to the pro forma amounts indicated
below:
Year Year
Ended Ended
July 31, 2000 July 31, 1999
<S> <C> <C>
Net income (loss) - as reported $ (922,536) $ 70,432
============ =============
Net loss - pro forma $ (1,108,310) $ (871,229)
============ =============
Earnings (loss) per share - as reported:
Basic $ (.12) $ 0.01
============ =============
Diluted $ (.12) $ 0.01
============ =============
Loss per share - pro forma:
Basic $ (.14) $ (0.11)
============ ============
Diluted $ (.14) $ (0.11)
============ ============
The fair value of options granted under the stock option agreements
and stock-based compensation plans discussed above is estimated on the
date of grant using the Black-Scholes option pricing model with the
following weighted-average assumptions used for grants in 2000: no
dividend yield; risk free interest rate of 5.25%; expected life of 10
years; and expected volatility of 104.26%. 1999: no dividend yield;
risk-free interest rate of 5.61%; expected life of 10 years; and
expected volatility of 106.73%. The weighted average fair value of
options granted in 2000 and 1999 was $1.39 and $2.19, respectively.
The weighted average remaining contractual life of options outstanding
at July 31, 2000 was 4.6 years.
The following table summarizes information on stock option activity
for the Executive Options, the Employee Plan, the Incentive Plan and
the Non-Qualified Plan:
Weighted Average
Number of Exercise Price Exercise Price
Shares Per Share Per Share
-------- --------- ---------
Options outstanding,
July 31, 1998 588,500 $ 0.36 - $23.88 $ 6.25
Options granted 390,000 2.50 - 5.00 3.00
Options exercised (73,500) 4.00 - 23.88 18.96
---------
Options outstanding, July 31, 1999 905,000 0.36 - 23.50 3.82
Options granted 207,000 1.50 - 3.00 1.77
Options expired or cancelled (76,000) 1.94 - 23.50 9.92
---------
Options outstanding, July 31, 2000 1,036,000 $ 0.36 - $12.00 $ 2.96
=========
As of July 31, 2000, 941,500 options outstanding are currently
exercisable.
F-12
</TABLE>
<PAGE>
NOTE 3 SHAREHOLDERS' EQUITY (continued)
Repurchase of Common Stock:
On July 30, 1998, the Board of Directors authorized the repurchase of
up to 500,000 shares of the Company's common stock. The repurchase of
the Company's common stock was based upon the Board of Directors'
belief that the Company's common stock was undervalued considering the
Company's potential earnings and prospects for future operations.
Repurchases may be made periodically in the open market, block
purchases, or in privately negotiated transactions, depending on
market conditions and other factors. The Company has no commitment or
obligation to repurchase all or any portion of the shares.
From August 1, 1998 through July 31, 1999, the Company repurchased a
total of 64,000 shares of its common stock at a cost of $190,360. For
the year ended July 31, 2000, the Company repurchased a total of
35,800 shares of its common stock at a cost of $51,241.
NOTE 4 MAJOR CUSTOMERS AND FOREIGN REVENUE
In fiscal year 2000, revenue of $202,953 (13%) and $170,205 (11%) was
derived from sales to two separate customers. In fiscal year 1999,
revenue of $479,983 (17%) and $333,200 (12%) was derived from sales to
two separate customers. The Company's operations are located entirely
within the United States. However, in fiscal years 2000 and 1999,
$65,028 (4%) and $399,400 (14%), respectively, of the Company's
revenues were to foreign customers.
NOTE 5 INCOME TAXES
Income tax benefit (provision) consists of the following for the years
ended July 31:
2000 1999
-------------- -------------
Current $ 113,054 $ (14,292)
Deferred 420,408 45,672
-------------- -------------
Income tax benefit $ 533,462 $ 31,380
============== =============
Income tax benefit (provision) includes the following federal and
state components for the years ended July 31:
2000 1999
-------------- -------------
Federal $ 475,072 $ 50,953
State 58,390 (19,573)
-------------- -------------
Income tax benefit $ 533,462 $ 31,380
============== =============
F-13
<PAGE>
NOTE 5 INCOME TAXES (continued)
The following items comprise the Company's net deferred tax assets
(liabilities) as of July 31:
2000 1999
---------- ----------
Deferred tax assets:
Net operating loss $ 358,498 $ 71,004
Deferred revenue 48,405 95,718
General business credit 17,225 54,730
--------- ----------
Total 424,128 221,452
Deferred tax liabilities:
Depreciation and amortization (410,091) (627,823)
--------- ----------
Net deferred tax asset (liability) $ 14,037 $ (406,371)
========= ==========
Total income tax expense (benefit) differed from the amounts computed
by applying the U.S. Federal statutory tax rates to pre-tax income for
the years ended July 31, 2000 and 1999 as follows:
2000 1999
------ ------
Total expense (benefit) computed by:
Applying the U.S. Federal statutory rate (34.0)% 34.0)%
State income taxes, net of federal tax benefit (4.0) (4.0)
General business credits and other 1.4 (42.3)
------ ------
Effective tax rate (benefit) (36.6)% (80.3)%
====== ======
The Company has net operating losses of approximately $996,000 that
are available to be carried back or forward. The net operating loss
will expire in year 2020. Additionally, the Company has unused general
business credit of approximately $17,000 that is available to offset
future income taxes. The general business tax credit will expire in
year 2014.
NOTE 6 COMMITMENTS
Operating Leases:
The Company has an operating lease agreement for office space through
December 31, 2000. Future minimum lease payments for the year ending
July 31, 2001 are approximately $57,500. Total rent expense was
approximately $147,182 and $134,674 in fiscal 2000 and 1999,
respectively.
F-14
<PAGE>
NOTE 6 COMMITMENTS (continued)
Operating Leases: (continued)
The Company also leases telephone equipment under the terms of an
operating lease. The lease calls for monthly payments of $3,227 and
expires August 31, 2002. Future minimum lease payments are as follows:
Year Ending July 31
2001 $ 38,724
2002 38,724
2003 3,227
-----------
$ 80,675
===========
Rent expense was $38,724 for the year ended July 31, 2000.
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. There were no contributions for the years
ended July 31, 2000 and 1999.
Investments and 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. Awards of
$75,000 were granted for the year ended July 31, 2000. Awards of
$75,000 were granted and funded with a deposit to the "Rabbi" Trust
during the year ended July 31, 1999. The funds are subject to the
general claims of creditors and are included in investments as of July
31, 2000 and 1999.
The following information is provided related to the trust assets,
which primarily consist of equity securities as of July 31, 2000 and
1999, which based upon the Company's intended use of the investments
have been classified as trading securities. Unrealized holding gains
on trading securities are included in income.
2000 1999
------------- ---------------
Cost basis $ 368,447 $ 300,000
Unrealized holding gains 367,366 153,053
------------- ---------------
Aggregate fair value $ 735,813 $ 453,053
============= ===============
F-15
<PAGE>
NOTE 6 COMMITMENTS (continued)
Employment Agreements:
The Company has entered into employment agreements with Thomas V.
Geimer, Harry J. Fleury, James Godkin and Franz Huber. Mr. Geimer's
employment agreement is for a two year term, is automatically
renewable for one year increments, and provides for a yearly salary of
$100,000 with deferred compensation of $75,000 per year. Mr. Geimer's
agreement also contains provisions under which the Company will be
obligated to pay Mr. Geimer five times his annual salary and deferred
compensation in the amount of $50,000 (i.e., an aggregate of $750,000)
if a change of control as defined in the agreement occurs. The two
year employment agreements for Messrs. Fleury, Godkin and Huber are
automatically renewable for one year increments, and provide for
annual salary payments of $75,000, $58,000 and $80,000, respectively.
The employment agreements also provide for annual bonuses in the
discretion of the Company, and Mr. Fleury will be paid commissions
relating to the generation of foreign sales of the Compan s products
and services. The agreements for Messrs. Fleury, Godkin and Huber also
contain provisions under which the Company will be obligated to pay
them two times their annual salary in the event that change of control
as defined in their agreements occurs.
NOTE 7 ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, investments and
other long-term liabilities approximates fair value at July 31, 2000
and 1999.
The carrying value of all other financial instruments potentially
subject to valuation risk, principally consisting of accounts
receivable and accounts payable, also approximate fair value.
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.
NOTE 8 LEGAL PROCEEDINGS
The Company is a party to certain legal proceedings, the outcome of
which management believes will not have a significant impact upon the
financial position of the Company. The Company is not able to predict
the outcome of the litigation described below with any degree of
certainty, and there can be no assurance that the resolution of one or
more of the cases described below may not have a material adverse
effect on the Company.
On November 16, 1999, the United States Securities and Exchange
Commission ("SEC") filed suit in the United States District Court for
the District of Colorado against Accelr8 Technology Corporation,
Thomas V. Geimer, Harry J. Fleury and James Godkin. The SEC seeks an
injunction permanently restraining and enjoining each Defendant from
violating Section 10(b) of the Securities Exchange Act of 1934, and
Rule 10b-5 promulgated thereunder; Section 13(a) of the Securities
Exchange Act of 1934, and Rules 12b-20, 13a-1, and 13a-13 promulgated
thereunder; and that Mr. Geimer and Mr. Godkin be enjoined from future
violations of Section 13(b)(2) of the Securities Exchange Act of 1934.
No civil penalty is sought against Accelr8. An unspecified civil
penalty in an amount to be determined by the Court is sought against
Messrs. Geimer, Fleury, and Godkin.
F-16
<PAGE>
NOTE 8 LEGAL PROCEEDINGS (continued)
The SEC alleges that the defendants made material misrepresentations
of fact regarding the capability of certain of the Company's products,
and the Company's financial condition, including its revenues and
earnings. The SEC also alleges that Mr. Geimer and Mr. Godkin failed
to implement, or circumvented, a system of internal accounting
controls, falsified books and records and made misrepresentations to
the Company's accountants. The Company and the individual defendants
have moved for summary judgment on the alleged violations of Section
10(b) of the Securities Exchange Act of 1934, and Rule 10b-5
thereunder. A hearing on the Motion for Summary Judgment is scheduled
for January 9, 2001. No trial date has been set. Accelr8 and the
individual defendants believe that they have substantial defenses to
the violations alleged. However, there are no assurances that the
resolution of this case will not have a material adverse effect on the
Company. The Company is paying the costs of its own defense, as well
as the costs of defense of the individual defendants under its
indemnification obligations. These costs may be material to the
Company.
On May 4, 2000, Harley Meyer filed in the United States District Court
for the District of Colorado a putative class action against Accelr8
Technology Corporation, Thomas V. Geimer and Harry J. Fleury. On June
2, 2000, Charles Germer filed in the United States District Court for
the District of Colorado a putative class action against Accelr8
Technology Corporation, Thomas V. Geimer and Harry J. Fleury.
On June 8, 2000, William Blais filed in the United States District
Court for the District of Colorado a putative class action against
Accelr8 Technology Corporation, Thomas V. Geimer and Harry J. Fleury.
On June 20, 2000, Diana Wright filed in the United States District
Court for the District of Colorado a putative class action against
Accelr8 Technology Corporation, Thomas V. Geimer and Harry J. Fleury.
On August 14, 2000, Derrick Hongerholt filed in the United States
District Court for the District of Colorado a shareholder derivative
action against Thomas V. Geimer, David C. Wilhelm, A. Alexander Arnold
III, Harry J. Fleury, James Godkin and Accelr8 Technology Corporation
as a nominal defendant. These actions have been consolidated. On
October 16, 2000, a Consolidated Amended Class Action Complaint was
filed which adds James Godkin as a defendant. The Consolidated Amended
Complaint alleges violations of Section 10(b) of the Securities
Exchange Act of 1934, and Rule 10b-5 thereunder, essentially making
the same allegations as were made by the SEC. The Defendants have not
yet responded to that Amended Complaint. On October 23, 2000, a Motion
for Class Certification was filed. The Defendants have not yet
responded to that motion. Accelr8, Mr. Geimer, Mr. Fleury and Mr.
Godkin have answered the Hongerholt derivative complaint, and have
denied all claims. Accelr8 believes it has substantial defenses to
these claims, but there are no assurances that the resolution of these
actions will not have a material adverse effect on the Company. The
consolidated putative class actions, including the Hongerholt
derivative action, have not been set for trial. The Company is paying
the costs of its own defense, as well as the costs of the defense of
the individual defendants under its indemnification obligations. These
costs may be material to the Company.
On May 24, 2000, William Dews, an alleged shareholder of Accelr8,
filed a derivative action on behalf of Accelr8, against Thomas Geimer,
Alexander Arnold and David Wilhelm. This action alleges various
breaches of fiduciary duty arising out of the activities alleged by
the SEC, as well as the Company's determination to defend against the
SEC's allegations. Mr. Geimer filed a Motion to Dismiss this action,
which Motion was denied. Thereafter, Mr. Geimer filed an answer
denying the claims.
F-17
<PAGE>
NOTE 8 LEGAL PROCEEDINGS (continued)
Mr. Wilhelm and Mr. Arnold have also filed Motions to Dismiss, which
motions are still pending. Although no claims are asserted against
Accelr8 in this action, Accelr8 is bearing the costs of defense in
accordance with indemnification agreements with Mr. Geimer, Mr.
Wilhelm, and Mr. Arnold. These costs may be material to the Company.
On July 14, 2000, the Agricultural Excess and Surplus Insurance
Company, which is the carrier of Accelr8's director and officer
liability policy, filed in the United States District Court for the
District of Colorado an action for a declaratory judgment seeking to
rescind Accelr8's directors and officer's liability policy. The
insurance company alleges that it was fraudulently induced to enter
into the contract of insurance because of claimed knowing material
misrepresentations about the capabilities of certain of the Company's
products made in the Company's Form 10-K filed with the SEC. Accelr8
has moved to dismiss the Complaint, which motion is still pending.
Although Accelr8 believes the insurance company's claim to be not
well-founded, there is no assurance that the resolution of this case
will not have a materially adverse effect on the Company.
In August 1998, and thereafter, Defendants John R. Kuney, Albert
Wallace and Diana Wallace posted defamatory statements on various
investment service "message boards" relating to the Company on the
internet, which is the subject of the matter of the Company's claims
against those parties. The Company filed suit against various unnamed
parties in the District Court, City and County of Denver, State of
Colorado (Case No. 99 CV 7818), and as a result of discovery was able
to determine the identities of the parties who had posted the
defamatory statements and to amend the Company's complaint to
specifically name these parties as defendants. Defendant Albert
Wallace filed counterclaims against the Company for retaliatory
discharge, wrongful discharge, and for luring and abuse of process.
Defendant Diana Wallace also filed a counterclaim for abuse of
process. A bi-furcated trial of this matter currently is set as
follows: Lawsuit against John R. Kuney set for a three-day trial
beginning March 12, 2001. A two-week trial set for the lawsuit against
Albert R. Wallace and Diana Wallace beginning on May 14, 2001. The
parties are engaged in pre-trial discovery. The Company is pursuing
prosecution of its claims and defending the counterclaims filed
against it. Management believes that it has substantial defenses to
the counterclaims brought against the Company; however, there can be
no assurance that resolution of these cases will not have a material
adverse effect on the Company. The Company is paying the costs of this
litigation, as well as the costs of defense of the counterclaims under
its indemnification obligations. These costs may be material to the
Company.
NOTE 9 SUBSEQUENT EVENT (unaudited)
On November 1, 2000, the Company announced the signing of a
non-binding letter of intent to acquire 100% ownership of OpTest TM
Technology from DDX, Inc., a privately owned Colorado corporation
located in Denver, Colorado. The acquisition is subject to the
completion of satisfactory due diligence and certain other conditions.
OpTest TM Platform Technologies have a wide range of potential
application to human and veterinary clinical and point of care
diagnostics. The technologies are being developed as easy to use,
cost-effective, highly sensitive and portable systems for rapid
detection and quantification of molecular and microscopic scale
affinity binding events.
F-18
<PAGE>
NOTE 9 SUBSEQUENT EVENT (unaudited) (continued)
The terms of the agreement call for $500,000 cash and the issuance of
approximately 1,925,000 common shares of the Company. This transaction
is valued at $3,000,000 and contemplates a commitment from the Company
to invest up to an additional $1,000,000 in research and development
over the next twelve months. The transaction is expected to close by
December 31, 2000.
F-19
