10KSB 1 0001.txt FORM 10KSB 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 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- 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. 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- 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- 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- 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- 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- 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- 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- 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- 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- 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- 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- 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- 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- 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- 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- 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- 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- 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- 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- 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- 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- 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- 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- 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- 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- 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- 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- 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- 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- 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- 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- 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- 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- 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- 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-
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 ------------------ ---- ------ ----- ------------ ------- 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-
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 ------- ------- ------- ------- 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-
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- 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- 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- 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- 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- ACCELR8 TECHNOLOGY CORPORATION FINANCIAL STATEMENTS JULY 31, 2000 AND 1999 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 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
ACCELR8 TECHNOLOGY CORPORATION BALANCE SHEETS FOR THE YEARS ENDED JULY 31, 2000 AND 1999 ASSETS 2000 1999 ------------ ------------ Current assets: 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
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
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 ----------- ----------- ----------- ------------ ------------ ----------- 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
ACCELR8 TECHNOLOGY CORPORATION STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED JULY 31, 2000 AND 1999 2000 1999 ------------ ------------ Cash flows from operating activities: 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
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 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 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
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 ---------- ----------- --------- ---------- ----------- ---------- 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
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 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
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 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
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 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 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 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 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 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 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