-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VuAZe5x/hmrJdAIPN7KVvcit2lkkWXiBqViEy13ydhYKnklSfvOJ8nlwj7g9Oy/e UzwsGBfjCP3NkC6bULF8zA== 0000950127-02-000310.txt : 20020415 0000950127-02-000310.hdr.sgml : 20020415 ACCESSION NUMBER: 0000950127-02-000310 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020131 FILED AS OF DATE: 20020311 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ACCELIO CORP CENTRAL INDEX KEY: 0000887614 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 000000000 STATE OF INCORPORATION: A1 FISCAL YEAR END: 0430 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-11898 FILM NUMBER: 02572092 BUSINESS ADDRESS: STREET 1: 560 ROCHESTER ST STE 400 CITY: OTTAWA ONTARIA CANAD STATE: A6 ZIP: M5L 1A9 BUSINESS PHONE: 6132303676 MAIL ADDRESS: STREET 1: ACCELIO CORPORATION STREET 2: 560 ROCHESTER ST OTTAWA CANADA FORMER COMPANY: FORMER CONFORMED NAME: JETFORM CORP DATE OF NAME CHANGE: 19930328 10-Q 1 a_10q.txt FORM 10-Q - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------------- FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended January 31, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period From ---- To ---- Commission file number 1-111898 -------- ACCELIO CORPORATION (Exact name of registrant as specified in its charter) CANADA N/A - --------------------------- -------------------------- (state or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 560 Rochester Street Ottawa, Ontario K1S 5K2, Canada ----------------------------------------- (Address of principal executive offices) (613) 233-2256 ------------------------ Registrant's telephone number (including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- APPLICABLE ONLY TO CORPORATE ISSUERS The number of the issuer's Common Shares outstanding on February 21, 2002: 24,969,794 - -------------------------------------------------------------------------------- 1 ACCELIO CORPORATION TABLE OF CONTENTS PART I FINANCIAL INFORMATION Page No. Item 1. Financial Statements Consolidated Balance Sheets as at January 31, 2002, and 3 April 30, 2001 Consolidated Statements of Operations for the three and nine 4 month periods ended January 31, 2002 and January 31, 2001 Consolidated Statements of Comprehensive Income for the 5 three and nine month periods ended January 31, 2002 and January 31, 2001 Consolidated Statements of Cash Flows for the three month 6 and nine month periods ended January 31, 2002 and January 31, 2001 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial 19 Condition and Results of Operations PART II OTHER INFORMATION Item 1. Legal Proceedings 29 Item 6. Exhibits and Reports on Form 8-K 29 SIGNATURES 30 This Quarterly Report on Form 10-Q ("Report"), contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933. Discussions containing such forward-looking statements may be found in Item 2 of Part I and Item 1 of Part II hereof, as well as within this Report generally. In addition, when used in this Report, the words "believes", "intends", "anticipates", "expects", and similar expressions are intended to identify forward-looking statements. Such statements are subject to a number of risks and uncertainties. Actual results in the future could differ materially from those described in the forward-looking statements as a result of changes in technology, changes in industry standards, new product introduction by competitors, increased participation in the enterprise software market by major corporations and other matters set forth in this Report. The Company does not undertake any obligation to publicly release the results of any revisions to these forward-looking statements that may be made to reflect any future events or circumstances. 2
ACCELIO CORPORATION CONSOLIDATED BALANCE SHEETS (in thousands of Canadian dollars, except share amounts) January 31, April 30, 2002 2001 ---------------- ------------ ASSETS Current assets Cash and cash equivalents.............................. $ 28,163 $ 41,426 Accounts receivable (Note 2)........................... 18,909 28,488 Term accounts receivable (Note 2)...................... 1,187 3,962 Unbilled receivables................................... 1,929 2,399 Inventory.............................................. 721 869 Prepaid expenses ...................................... 3,890 3,684 --------------- ------------ 54,799 80,828 Fixed assets (Note 3).................................. 11,953 12,722 Other assets (Note 4).................................. 19,397 21,126 --------------- ------------ $ 86,149 $ 114,676 =============== ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts payable....................................... $ 2,976 $ 4,039 Accrued liabilities ................................... 12,148 11,911 Unearned revenue....................................... 14,742 15,788 Term loan (Note 5)..................................... 10,000 -- Obligations under capital lease (Note 10).............. 987 919 ---------------- ------------ 40,853 32,657 Accrued liabilities (Note 8)............................. 249 446 Term loan (Note 5)....................................... -- 10,000 Obligations under capital lease (Note 10)................ 880 1,011 ---------------- ------------ 41,982 44,114 ---------------- ------------ Shareholders' equity Capital stock (Issued and outstanding -- 24,969,794 Common Shares at January 31, 2002; 24,831,527 273,126 272,587 Common Shares at April 30, 2001) .................... Cumulative translation adjustment...................... (3,341) (4,206) Deficit................................................ (225,618) (197,819) ---------------- ------------ 44,167 70,562 ---------------- ------------ $ 86,149 $144,676 ================ ============ (the accompanying notes are an integral part of these consolidated financial statements)
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ACCELIO CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands of Canadian dollars except share and per share amounts) Three months ended Nine months ended Janaury 31, January 31, ------------------------------ ------------------------------- 2002 2001 2002 2001 ------------- -------------- -------------- -------------- Revenues Product................................ $ 13,167 $ 13,188 $ 32,310 $ 43,101 Service................................ 12,178 10,164 36,902 28,992 ------------- -------------- -------------- -------------- 25,345 23,352 69,212 72,093 ------------- -------------- -------------- -------------- Costs and expenses Cost of product........................ 1,731 1,910 5,184 6,042 Cost of service........................ 3,729 2,766 13,325 8,052 Sales and marketing.................... 12,773 13,107 42,909 38,509 General and administrative............. 2,715 2,569 8,762 7,301 Research and development (Note 6)...... 4,079 4,227 14,115 12,233 Depreciation and amortization.......... 2,707 2,709 8,232 7,770 Takeover defence costs................. 4,545 -- 4,545 -- Gain on sale of assets................. -- -- (200) -- ------------- -------------- -------------- -------------- 32,279 27,288 96,872 79,907 ------------- -------------- -------------- -------------- Operating loss (6,934) (3,936) (27,660) (7,814) Net investment income ................. (80) 227 (22) 654 Other income (expense)................. (15) 37 285 62 ------------- -------------- -------------- -------------- Loss before taxes (7,029) (3,672) (27,397) (7,098) Income tax Current (Note 7)...................... (140) (201) (402) (860) ------------- -------------- -------------- -------------- Net loss $ (7,169) $ (3,873) $ (27,799) $ (7,958) ============= ============== ============== ============== Basic income (loss) per share Net loss per share..................... $ (0.29) $ (0.16) $ (1.12) $ (0.36) Weighted average number of shares...... 24,932,312 24,688,946 24,897,221 21,901,600 Fully diluted income (loss) per share Net loss per share....................... $ (0.29) $ (0.16) $ (1.12) $ (0.36) Weighted average number of shares........ 24,932,312 24,688,946 24,897,221 21,901,600 (the accompanying notes are an integral part of these consolidated financial statements)
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ACCELIO CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (in thousands of Canadian dollars) Three months ended Nine months ended January 31, January 31, ----------------------------- ------------------------------ 2002 2001 2002 2001 ------------ -------------- ------------- -------------- Net loss..................................... $ (7,169) $ (3,873) $ (27,799) $(7,958) Other comprehensive income (loss):........... -- -- -- -- Cumulative translation adjustment (net of tax of nil):................................. (2,444) (274) 865 (1,161) ------------ -------------- ------------- -------------- Comprehensive loss........................... $ (9,613) $ (4,147) $ (26,934) $(9,119) ============ ============== ============= ============== (the accompanying notes are an integral part of these consolidated financial statements)
5 ACCELIO CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands of Canadian dollars)
Three months ended Nine months ended January 31, January 31, --------------------------- ---------------------------- 2002 2001 2002 2001 ------------ ----------- ------------ ------------ Cash provided from (used in): Operating activities Net loss................................ $ (7,169) $(3,873) $ (27,799) $(7,958) Items not involving cash: Depreciation and amortization......... 2,983 3,630 8,829 10,498 Deferred income taxes................. - - - - Other non-cash items.................. (2,213) 3,472 1,206 (1,055) Net change in operating components of working capital (Note 11)........... 6,741 (2,197) 11,158 (7,442) ------------ ----------- ------------- ------------ 342 1,032 (6,606) (5,957) ------------ ----------- ------------- ------------ Investing activities Purchase of fixed assets................ (344) (4,084) (2,878) (8,698) Purchase of other assets................ (894) (1,572) (3,038) (3,267) Purchase of business.................... - (151) - (151) ------------- ------------ ------------- ------------- (1,238) (5,807) (5,916) (12,116) ------------- ------------ ------------- ------------- Financing activities Proceeds from issuance of shares....... 115 2,980 351 24,090 Repayment of debt....... -- (397) -- (397) Capital lease repayments................ (285) (10) (1,215) (10) ------------- ------------ ------------- ------------- (170) 2,573 (864) 23,683 ------------- ------------ ------------- ------------- Effect of exchange rate changes on cash (350) 249 123 32 ------------- ------------ ------------- ------------- Increase (decrease) in cash and cash equivalents........................... (1,416) (1,953) (13,263) 5,642 Cash and cash equivalents, beginning of period............................. 29,579 49,687 41,426 42,092 ------------- ------------ ------------- ------------- Cash and cash equivalents, end of period................................ $ 28,163 $ 47,734 $ 28,163 $47,734 ============= ============ ============= ============= (the accompanying notes are an integral part of these consolidated financial statements)
6 ACCELIO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. SIGNIFICANT ACCOUNTING POLICIES (a) Basis of presentation These consolidated financial statements have been prepared by management in accordance with accounting principles generally accepted in the United States ("U.S. GAAP"), and include all assets, liabilities, revenues and expenses of Accelio Corporation ("Accelio") and its wholly-owned subsidiaries: Accelio Corporation (a Delaware corporation), JF A'Asia Pty. Limited ("Accelio Pacific"), Accelio Aktiebolag ("Accelio Nordic"), Accelio France SA ("Accelio France"), Accelio UK Limited ("Accelio UK"), Accelio Deutschland GmbH ("Accelio Germany"), Accelio Technologies Limited ("Accelio Ireland"), Accelio Japan K.K. ("Accelio Japan"), Accelio Netherlands BV ("Accelio Netherlands"), Accelio Norge AS ("Accelio Norway") and Accelio PTE Ltd ("Accelio Singapore"). Accelio and its wholly-owned subsidiaries are collectively referred to herein as the "Company". Investments in businesses that the Company does not control, but over which it can exert significant influence, are accounted for using the equity method. Such investments are periodically evaluated for impairment and appropriate adjustments are recorded, if necessary. The unaudited interim consolidated financial statements reflect all adjustments which are, in the opinion of the Company's management, necessary for a fair statement of results for these interim periods. The unaudited interim financial statements should be read in conjunction with and follow the same accounting policies and methods of application as the most recent annual financial statements of April 30, 2001. (b) Revenue recognition The Company recognizes revenue in accordance with Statement of Position ("SOP") 97-2, "Software Revenue Recognition," issued by the American Institute of Certified Public Accountants ("AICPA"), SOP 98-9, "Modification of 97-2, Software Recognition with Respect to Certain Transactions" and Staff Accounting Bulletin (SAB) No. 101 "Revenue Recognition in Financial Statements", issued by the Securities and Exchange Commission (SEC). The Company records product revenue from packaged software and irrevocable commitments to purchase products when persuasive evidence of an arrangement exists, the software product has been shipped, there are no significant uncertainties surrounding product acceptance, the fees are fixed and determinable and collection is considered probable. The Company's Irrevocable Commitment Licenses ("ICLs") are arrangements to use multiple copies of a software product under site licenses with users and to market multiple copies of a software product under similar arrangements with resellers. These arrangements always include post-contract customer support ("PCS") and are typically less than a year in duration with a significant portion of the product license fee payable within the Company's normal trade terms. Revenues from irrevocable commitments to purchase products with payment terms exceeding the Company's customary trade terms are recorded at the amount receivable less deemed interest. The Company amortizes the difference between the face value of the receivable and the discounted amount over the term of the receivable and records the discount as interest income. Revenue from software product licenses which include significant customization and revenue from services are recognized on a percentage of completion basis, whereby revenue is recorded, based on labor input hours, at the estimated realizable value of work completed to date. Estimated losses on contracts are recognized when they become probable. Unbilled receivables represent consulting work performed under contract and not yet billed. Revenue from maintenance agreements ("PCS") is recognized ratably over the term of the agreement. Unearned revenue represents payments received from customers for services not yet performed. 7 ACCELIO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) 2. ACCOUNTS RECEIVABLE Accounts receivable and term accounts receivable are net of an allowance for doubtful accounts of $3.7 million at January 31, 2002, and $2.9 million at April 30, 2001. The Company records revenues from irrevocable commitments to purchase products which do not conform to the Company's customary trade terms at the minimum amount receivable less deemed interest ("Term Accounts Receivable"). The Company's Irrevocable Commitment Licenses ("ICLs") are arrangements to use multiple copies of a software product under site licenses with users and to market multiple copies of a software under similar arrangements with resellers. These arrangements always include post-contract customer support ("PCS") and are typically less than a year in duration with a significant portion of the product license fee payable within the Company's normal trade terms. License revenue from arrangements having extended payment terms were $477,000 for the three months ended January 31, 2002, and $1.1 million in the nine months ended January 31, 2002 compared to $1.5 million for the three months ended January 31, 2001 and $2.1 million for the nine months ended January 31, 2001. For the three months ended January 31, 2002, the discount rate used was 6.5%. Payment of Term Accounts Receivable is generally due the earlier of: (i) delivery of the Company's products by the customer to its customers or end users; and (ii) specific dates in the license agreement ("Minimum Payment Dates"). The amount of these receivables at January 31, 2002, and April 30, 2001 was $1.2 million and $4.0 million, respectively. The Company's customer base consists of large numbers of diverse customers dispersed across many industries and geographies. As a result, concentration of credit risk with respect to accounts receivable and term accounts receivable is not significant. 3. FIXED ASSETS
January 31, 2002 ----------------------------------------------------- Accumulated Net book Cost depreciation value ------------- ----------------- --------------- (in thousands of Canadian dollars) Computer equipment........ $ 21,847 $ 16,610 $ 5,237 Furniture and fixtures.... 9,501 6,350 3,151 Leasehold improvements.... 6,096 2,531 3,565 ------------- ----------------- --------------- $ 37,444 $ 25,491 $ 11,953 ============= ================= =============== April 30, 2001 ----------------------------------------------------- Accumulated Net book Cost depreciation value ------------- ----------------- --------------- (in thousands of Canadian dollars) Computer equipment........ $20,013 $13,999 $6,014 Furniture and fixtures.... 9,152 5,424 3,728 Leasehold improvements.... 4,974 1,994 2,980 ------------- ----------------- --------------- $34,139 $21,417 $12,722 ============= ================= ===============
8 ACCELIO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) 4. OTHER ASSETS
January 31, 2002 ----------------------------------------------------- Accumulated Net book Cost amortization value ------------- -------------- --------------- (in thousands of Canadian dollars) Delrina technology, trademarks, trade names and workforce.... $ 16,081 $ 11,946 $ 4,135 Software....................... 18,617 9,371 9,246 Goodwill....................... 2,234 1,543 691 Licenses, marketing and distribution rights....................... 7,001 4,053 2,948 Capitalized software costs..... 17,294 16,928 366 Other assets................... 6,263 4,252 2,011 ----------- ------------ --------------- $ 67,490 $ 48,093 $ 19,397 =========== ============ =============== April 30, 2001 ----------------------------------------------------- Accumulated Net book Cost amortization value ------------- -------------- --------------- (in thousands of Canadian dollars) Delrina technology, trademarks, trade names and workforce.... $ 16,081 $ 11,146 $ 4,935 Software....................... 16,955 8,105 8,850 Goodwill....................... 2,203 1,319 884 Licenses, marketing and distribution rights....................... 6,792 3,375 3,417 Capitalized software costs..... 17,294 16,331 963 Other assets................... 6,234 4,157 2,077 ----------- ------------ --------------- $ 65,559 $ 44,433 $ 21,126 =========== ============ ===============
5. FINANCIAL INSTRUMENTS AND CREDIT FACILITY The Company has entered into receivable purchase agreements with certain third party purchasers. Under the agreements, the Company has the option to sell certain accounts receivable on a recourse basis. The Purchasers have recourse in the event of a trade dispute as defined in the receivables purchase agreements. As at January 31, 2002 and April 30, 2001, the outstanding balance of accounts receivable sold under these agreements was approximately US$2.6 million and US$3.6 million, respectively. The recourse obligation is estimated to be nil as the Company believes that none of the receivables sold are at risk of recourse. The Company has a committed $20 million credit facility with the Royal Bank of Canada ("RBC"). This credit facility is made up of (i) a $10 million term loan facility which bears interest at a rate of RBC prime plus 2.25% and is payable on August 1, 2002 and (ii) a $10 million operating facility that bears interest at a rate of RBC prime plus 1%. The credit facility is in effect until August 1, 2002. As at January 31, 2002, the Company had drawn all of the $10 million term loan facility and fixed the interest rate until April 17, 2002, at 1.98%. The Company had no borrowings against its operating facility at January 31, 2002. The Company has granted, as collateral for the $20 million credit facility, a general security agreement over Accelio's assets, including assignment of receivables insurance and a pledge of the shares of certain subsidiaries. When the Company deems appropriate, Accelio uses forward contracts and purchased options to manage exposures to foreign exchange. The Company's objective is to minimize risk using the most effective methods to eliminate or reduce the impacts of this exposure. Accelio does not enter into financial instruments for speculative or trading purposes. As at January 31, 2002, the Company had no outstanding foreign exchange financial instruments. 9 ACCELIO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) 6. RESEARCH AND DEVELOPMENT EXPENSE The following table provides a summary of capitalized software costs and the related amortization and write down charged to cost of product in the three and nine months ended January 31, 2002 and January 31, 2001.
Three months ended Nine months ended January 31, January 31, ----------------------------- ------------------------------ 2002 2001 2002 2001 ----------------------------- ------------------------------ (in thousands of (in thousands of Canadian dollars) Canadian dollars) Research and development costs........ $ 4,079 $ 5,198 $ 14,115 $ 14,901 Capitalized software costs............ -- (971) -- (2,668) ------------ -------------- ------------- -------------- Net research and development expense.. $ 4,079 $ 4,227 $ 14,115 $ 12,233 ============ ============== ============= ============== Amortization of development costs charged to cost of product............ $ 161 $ 814 $ 482 $ 2,432 ============ ============== ============= ============== Write-down of development costs charged to cost of product............ $-- $-- $ 115 $-- ============ ============== ============= ==============
7. INCOME TAXES As at January 31, 2002, the Company had net deferred tax assets of $79.6 million (January 31, 2001, $58.5 million), the principal components of which were temporary differences associated with the acquisition of in process research and development and operating loss carry forwards. The Company believes sufficient uncertainty exists regarding the realizability of these net deferred tax assets such that a valuation allowance of $79.6 million (January 31, 2001, $52.9 million) has been applied. During the quarter ended January 31, 2002, the Company recorded a provision for domestic capital taxes and foreign jurisdiction income tax of $140,000 (January 31, 2001, $201,000). 10 ACCELIO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) 8. PROVISION FOR RESTRUCTURING COSTS On March 17, 1999, the Corporation announced a restructuring plan and recorded a provision for restructuring costs of $30.5 million directed at reducing costs. The key restructuring actions included: o Consolidation of management responsibilities and reduction in headcount; o Closure of redundant facilities; o Reduction in the carrying value of certain capital assets primarily related to past acquisitions; and o Cancellation of certain commitments and other costs. The following table summarizes the activity in the restructuring costs during the nine months ended January 31, 2002:
Employee Total Non Cash Total Termination Facilities Other Costs Costs Provision --------------------------------------------------------------------------- Restructuring provision............ $ 5,252 $2,914 $726 $8,892 $21,611 $ 30,503 Cash payments.......................... (1,175) (36) (207) (1,418) -- (1,418) Non-cash items......................... -- -- -- -- (21,611) (21,611) -------------- ----------- ---------- ----------- ------------ ------------ Balance, April 30, 1999........... $ 4,077 $2,878 $519 $7,474 $ -- $ 7,474 Cash payments...................... (2,921) (1,092) (124) (4,137) -- (4,137) Reductions........................... (566) (540) -- (1,106) -- (1,106) -------------- ----------- ---------- ----------- ------------ ------------ Balance, April 30, 2000........... $ 590 $1,246 $395 $2,231 $ -- $ 2,231 Cash payments...................... (468) (236) (121) (825) -- (825) Reductions........................... (122) (567) -- (689) -- (689) -------------- ----------- ---------- ----------- ------------ ------------ Balance, April 30, 2001............ $ -- $ 443 $274 $ 717 $ -- $ 717 Cash payments...................... -- (88) (40) (128) -- (128) Reductions........................... -- -- -- -- -- -- -------------- ----------- ---------- ----------- ------------ ------------ Balance, July 31, 2001........... $ -- $ 355 $234 $ 589 $ -- $ 589 Cash payments...................... -- (8) (41) (49) -- (49) Reductions........................... -- -- -- -- -- -- -------------- ----------- ---------- ----------- ------------ ------------ Balance, October 31, 2001........... $ -- $ 347 $193 $ 540 $ -- $ 540 Cash payments...................... -- (49) (42) (91) -- (91) Reductions........................... -- -- -- -- -- -- -------------- ----------- ---------- ----------- ------------ ------------ Balance, January 31, 2002........... $ -- $ 298 $ 151 $ 449 $ -- $ 449 ============== =========== ========== =========== ============ ============ Long-term balance.................. $ -- $ 249 $ -- $ 249 $ -- $ 249 ============== =========== ========== =========== ============ ============
Employee terminations totaled 105 and included 46 in sales and marketing, 40 in research and development, 12 in internal corporate services, and 7 in systems and consulting services. Employee terminations included salary continuance for which the Company was contractually obligated to pay. All employees were terminated on or before April 30, 1999. Facilities costs consisted primarily of $2.1 million and $780,000 related to the closure of the Company's United Kingdom and Toronto facilities, respectively. The provision for redundant facilities included management's best estimates of the total future operating costs of these vacant facilities for the remainder of their respective lease terms. Actual costs could differ from these estimates. During the nine months ended January 31, 2002, the Company's liability for vacant facilities was reduced by $145,000. The Company's long-term balance relates to a lease in the United Kingdom which expires April 30, 2010. Other cash costs related primarily to the cancellation of trade shows and other commitments. The remaining obligation relates to a service contract which expires August 31, 2002. During the nine months ended January 31, 2002, the Company's liability related to this commitment was reduced by $123,000. Non-cash costs included impairment losses of $21.6 million related to assets held for use. The losses were comprised of $16.6 million related to marketing and distribution rights, $3.1 million related to goodwill and $1.9 million related to other capital assets. 11 ACCELIO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) 9. SEGMENTED INFORMATION Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the Company's chief decision maker in deciding how to allocate resources and assessing performance. The Company's chief decision maker is the Chief Executive Officer. The Company's Chief Executive Officer primarily evaluates the Company on a geographic basis. The geographic evaluation is further segmented into Product, Consulting, and Customer Support components. The Product segment engages in business activities from which it earns license revenues from the Company's software products. The Consulting segment earns revenues from assisting customers in configuring, implementing and integrating the Company's products and, when required, customizing products and designing automated processes to meet the customer's specific business needs as well as providing all necessary training. The Customer Support segment earns revenues through after-sale support for software products as well as providing software upgrades under the Company's maintenance and support programs. The Company evaluates performance based on the contribution of each segment. The Product segment costs include all costs associated with selling product licenses. The costs of the Consulting and Customer Support segments include all costs associated with the delivery of the service to the customer. Inter-segment revenues as well as charges such as depreciation and amortization, interest expense and overhead allocation are not included in the calculation of segment profit. The Company does not use a measure of segment assets to assess performance or allocate resources. As a result, segment asset information is not presented. 12 ACCELIO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) The following tables sets forth, on a comparative basis for the periods indicated, the Company's segmented information:
Three months ended January 31, 2002 (in thousands of Canadian dollars) ----------------------------------------------------- Customer Product Consulting Support Total ----------------------------------------------------- North America Revenue....................... $ 6,068 $ 1,866 $ 5,157 $ 13,091 Costs......................... 5,442 1,511 726 7,679 ------------- ------------- ------------ ------------ Contribution.................. $ 626 $ 355 $ 4,431 $ 5,412 ------------- ------------- ------------ ------------ Europe Revenue....................... $ 6,466 $ 2,257 $ 2,443 $11,166 Costs......................... 4,112 1,026 466 5,604 ------------- ------------- ------------ ------------ Contribution.................. $ 2,354 $ 1,231 $ 1,977 $ 5,562 ------------- ------------- ------------ ------------ Asia Pacific Revenue....................... $ 633 $ 63 $ 392 $ 1,088 Costs......................... 1,316 - - 1,316 ------------- ------------- ------------ ------------ Contribution.................. $ (683) $ 63 $ 392 $ (228) ----------------------------------------------------- Total Revenue....................... $ 13,167 $ 4,186 $ 7,992 $ 25,345 Costs......................... 10,870 2,537 1,192 14,599 ------------- ------------- ------------ ------------ Contribution.................. $ 2,297 $ 1,649 $ 6,800 $ 10,746 ------------- ------------- ------------ ------------ Cost of product............... 1,731 Corporate marketing........... 1,903 Research and development...... 4,079 General and administration.... 2,715 Depreciation and amortization 2,707 Takeover defence costs........ 4,545 ------------ $ 17,680 ------------ Operating loss ............... (6,934) Net investment income......... (95) ------------ Loss before taxes............. $ (7,029) Provision for income taxes.... (140) ------------ Net loss...................... $ (7,169) ============
13 ACCELIO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited)
Three months ended January 31, 2001 (in thousands of Canadian dollars) ---------------------------------------------------- Customer Product Consulting Support Total ------------- ------------- ------------ ----------- North America Revenue....................... $ 7,024 $ 1,486 $ 4,948 $ 13,458 Costs......................... 6,262 744 1,051 8,057 ------------- ------------- ------------ ----------- Contribution.................. $ 762 $ 742 $ 3,897 $ 5,401 ------------- ------------- ------------ ----------- Europe Revenue....................... $ 4,992 $ 1,473 $ 1,887 $ 8,352 Costs......................... 3,307 524 447 4,278 ------------- ------------- ------------ ----------- Contribution.................. $ 1,685 $ 949 $ 1,440 $ 4,074 ------------- ------------- ------------ ----------- Asia Pacific Revenue....................... $ 1,172 $ 77 $ 293 $ 1,542 Costs......................... 1,130 - - 1,130 ------------- ------------- ------------ ----------- Contribution.................. $ 42 $ 77 $ 293 $ 412 ------------- ------------- ------------ ----------- Total Revenue....................... $ 13,188 $ 3,036 $ 7,128 $ 23,352 Costs......................... 10,699 1,268 1,498 13,465 ------------- ------------- ------------ ----------- Contribution.................. $ 2,489 $ 1,768 $ 5,630 $ 9,887 ------------- ------------- ------------ ----------- Cost of product............... 1,910 Corporate marketing........... 2,408 Research and development...... 4,227 General and administration.... 2,569 Depreciation and amortization 2,709 ----------- $ 13,823 ----------- Operating loss ............... (3,936) Net investment income......... 264 ----------- Income before taxes........... $ (3,672) Provision for income taxes.... (201) ----------- Net loss...................... $ (3,873) ===========
14 ACCELIO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited)
Nine months ended January 31, 2002 (in thousands of Canadian dollars) ----------------------------------------------------- Customer Product Consulting Support Total ------------- ------------- ------------ ------------ North America Revenue....................... $15,901 $ 7,746 $ 15,103 $ 38,750 Costs......................... 19,560 4,361 4,003 27,924 ------------- ------------- ------------ ------------ Contribution.................. $ (3,659) $ 3,385 $ 11,100 $ 10,826 ------------- ------------- ------------ ------------ Europe Revenue....................... $ 13,982 $ 5,867 $ 6,842 $ 26,691 Costs......................... 12,320 3,437 1,524 17,281 ------------- ------------- ------------ ------------ Contribution.................. $ 1,662 $ 2,430 $ 5,318 $ 9,410 ------------- ------------- ------------ ------------ Asia Pacific Revenue....................... $ 2,427 $ 313 $ 1,031 $ 3,771 Costs......................... 4,718 - - 4,718 ------------- ------------- ------------ ------------ Contribution.................. $ (2,291) $ 313 $ 1,031 $ (947 ) ------------- ------------- ------------ ------------ Total Revenue....................... $ 32,310 $ 13,926 $ 22,976 $ 69,212 Costs......................... 36,598 7,798 5,527 49,923 ------------- ------------- ------------ ------------ Contribution.................. $ (4,288) $ 6,128 $ 17,449 $ 19,289 ------------- ------------- ------------ ------------ Cost of product............... 5,184 Corporate marketing........... 6,311 Research and development...... 14,115 General and administration.... 8,762 Depreciation and amortization 8,232 Takeover defence costs........ 4,545 Gain on sale of asset......... (200) ------------ $ 46,949 ------------ Operating loss ............... (27,660) Net investment income......... 263 ------------ Loss before taxes............. $ (27,397) Provision for income taxes.... (402) ------------ Net loss...................... $ (27,799) ============
15 ACCELIO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited)
Nine months ended January 31, 2001 (in thousands of Canadian dollars) ---------------------------------------------------- Customer Product Consulting Support Total ------------- ------------- ------------ ----------- North America Revenue....................... $ 22,664 $ 4,262 $ 14,422 $ 41,348 Costs......................... 18,064 2,133 3,120 23,317 ------------- ------------- ------------ ----------- Contribution.................. $ 4,600 $ 2,129 $ 11,302 $ 18,031 ------------- ------------- ------------ ----------- Europe Revenue....................... $ 14,370 $ 4,031 $ 5,350 $ 23,751 Costs......................... 9,420 1,509 1,290 12,219 ------------- ------------- ------------ ----------- Contribution.................. $ 4,950 $ 2,522 $ 4,060 $ 11,532 ------------- ------------- ------------ ----------- Asia Pacific Revenue....................... $ 6,067 $ 352 $ 575 $ 6,994 Costs......................... 3,533 - - 3,533 ------------- ------------- ------------ ----------- Contribution.................. $ 2,534 $ 352 $ 575 $ 3,461 ------------- ------------- ------------ ----------- Total Revenue....................... $ 43,101 $ 8,645 $ 20,347 $ 72,093 Costs......................... 31,017 3,642 4,410 39,069 ------------- ------------- ------------ ----------- Contribution.................. $ 12,084 $ 5,003 $ 15,937 $ 33,024 ------------- ------------- ------------ ----------- Cost of product............... 6,042 Corporate marketing........... 7,492 Research and development...... 12,233 General and administration.... 7,301 Depreciation and amortization 7,770 ----------- $ 40,838 ----------- Operating loss................ (7,814) Net investment income......... 716 ----------- Loss before taxes............. $ (7,098) Provision for income taxes.... (860) ----------- Net loss...................... $ (7,958) ===========
16 ACCELIO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) 10. CAPITAL LEASE OBLIGATION The Company leases certain computer hardware and software under capital lease agreements. The capital leases have been recorded as fixed assets, other assets, and capital lease obligations in the accompanying financial statements. Depreciation related to the capital leases is included in depreciation and amortization expense for the three and nine months ended January 31, 2002. The total future minimum lease payments under capital leases at January 31, 2002 are as follows: in thousands of Canadian Years ending April 30, dollars 2002................................................. $ 285 2003................................................. 1,090 2004................................................. 706 2005................................................. 42 --------------- Total minimum lease payment.......................... 2,123 Less amounts representing interest................... (256) --------------- Present value of net minimum lease payments.......... $ 1,867 Less current portion................................. (987) --------------- Long term portion.................................... $ 880 --------------- 11. NET CHANGE IN OPERATING COMPONENTS OF WORKING CAPITAL The net change in operating components of working capital is comprised of:
Three months ended Nine months ended January 31, January 31, ---------------------------- ------------------------------- 2002 2001 2002 2001 ------------ ------------- ------------- -------------- (in thousands of (in thousands of Canadian dollars) Canadian dollars) Decrease (increase) in: Accounts receivable and term accounts receivable............ $ 6,566 $ 2,276 $ 14,010 $(3,070) Unbilled receivables............. 349 617 555 1,404 Inventory........................ 280 (40) 148 (4) Prepaid expenses................. (1,527) (539) (1,410) (467) Increase (decrease) in: Accounts payable................. (1,902) 34 (1,063) (3,202) Accrued liabilities.............. 2,956 (147) 247 (863) Unearned revenue................. 19 (4) (1,329) (1,240) ------------ ------------- ------------- -------------- $ 6,741 $ (2,197) $ 11,158 $(7,442) ============ ============= ============= ==============
17 ACCELIO CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited) 12. RECENT ACCOUNTING PRONOUNCEMENTS On October 3, 2001 the Financial Accounting Standards Board (FASB) issued Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, that replaces FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of and APB Opinion No. 30, Reporting Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, for the disposal of segments of business. Statement 144 requires that those long-lived assets be measured at the lower of carrying amount or fair value less cost to sell, whether reported in continuing operations or in discontinued operations. Therefore, discontinued operations will no longer be measured at net realizable value or include amounts for operating losses that have not yet occurred. The provisions of Statement 144 are effective for financial statements issued or fiscal years beginning after December 15, 2001 and, generally, are to be applied prospectively. This pronouncement will be effective for the Company's fiscal year beginning May 1, 2002. Management believes the adoption of SFAS No. 144 will not have a significant impact on the Company's financial condition or results of operations. In July 2001, the Financial Accounting Standards Board ("FASB") has issued the Statement of Financial Standards ("SFAS") No.141, Business Combinations, that will require all business combinations to use the purchase method of accounting. This pronouncement is effective for all business combinations initiated after June 30, 2001. The FASB has also issued SFAS No. 142, Goodwill and Other Intangible Assets, which will require intangible assets with an indefinite life and goodwill to be tested for impairment on an annual basis. Goodwill and indefinite life intangibles will no longer be amortized. Intangible assets with a definite life will continue to be amortized over their useful life. This pronouncement will be effective for the Company's fiscal year beginning May 1, 2002. Management believes the adoption of SFAS No. 141 and SFAS No. 142 will not have a significant impact on the Company's financial condition or results of operations. In June 1998, the FASB issued the Statement of Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). This statement establishes accounting and reporting standards for derivative instruments and hedging activities and is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. In June, 1999, the FASB issued SFAS No.137, which delays the effective date of SFAS 133 until fiscal years beginning after June 15, 2000. Currently, as the Company has no derivative instruments, the adoption of SFAS No. 133 has had no impact on the Company's financial condition or results of operations. 13 SUBSEQUENT EVENT On February 1, 2002, Adobe Systems Incorporated ("Adobe") announced a proposed agreement to acquire the Company. Under the terms of the agreement, Adobe common stock, valued at $72.0 (US) million on closing will be exchanged for all the Company's equity securities. The proposed acquisition is subject to the execution of customary transaction documents and the satisfaction of customary closing conditions, including the approval of the Company's shareholders and clearance of the acquisition by U.S. and Canadian regulatory authorities. The Company has agreed to pay a breakup fee of US$2.88 million and expenses of US$1.25 million to Adobe if the Board of Directors of Accelio supports another transaction. The transaction is expected to close in April 2002. On February 4, 2002 Open Text announced that it had extended its offer to acquire all of the outstanding Common Shares of Accelio Corporation until 5:00 p.m. on April 30, 2002. 14. COMPARATIVE RESULTS Certain of the prior years' figures have been reclassified in order to conform to the presentation adopted in the current year. 18 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Introduction The following discussion of the Company's results of operations and of its liquidity and capital resources should be read in conjunction with the information contained in the Consolidated Financial Statements and related Notes thereto. The following discussion provides a comparative analysis of material changes for the quarters ended January 31, 2002, and 2000, in the financial condition and results of operations of the parent company ("Accelio") and its wholly-owned subsidiaries: Accelio Corporation (a Delaware corporation), JF A'Asia Pty. Limited ("Accelio Pacific"), Accelio Scandinavia AB ("Accelio Nordic"), Accelio France SA ("Accelio France"), Accelio UK Limited ("Accelio UK"), Accelio Deutschland GmbH ("Accelio Germany"), Accelio Technologies Limited ("Accelio Ireland"), Accelio Japan K.K. ("Accelio Japan"), Accelio Netherlands BV ("Accelio Netherlands") and Accelio PTE Ltd ("Accelio Singapore"). Accelio and its wholly-owned subsidiaries are collectively referred to herein as the "Company". Results of Operations The Company's revenues and operating results have varied substantially from quarter to quarter. With the exception of its consulting services operation, the Company has historically operated with little backlog of orders because its software products are generally shipped as orders are received. The Company records product revenue from packaged software and irrevocable commitments to purchase products when persuasive evidence of an arrangement exists, the software product has been shipped, there are no significant uncertainties surrounding product acceptance, the fees are fixed and determinable and collection is considered probable. As a result, product revenue in any period is substantially dependent on orders booked and shipped in that period. Product revenue is difficult to forecast due to the fact that the Company's sales cycle, from initial trial to multiple copy licenses, varies substantially from customer to customer. As a result, variations in the timing of product sales can cause significant variations in operating results from period to period. Product revenue represented 52% of total revenue for the quarter ended January 31, 2002. Service revenue primarily consists of consulting services, training and technical support. Consulting services include assisting customers to configure, implement and integrate the Company's products and, when required, customize products and design automated processes to meet customers' specific business needs. Service revenue represented 48% of total revenue for the quarter ended January 31, 2002. Costs and expenses are comprised of cost of product, cost of service, sales and marketing, general and administrative, research and development, depreciation and amortization and other expenses. Cost of product consists of the cost of disks, manuals, packaging, freight, royalty payments to vendors whose software is bundled with certain products, amortization of deferred product development costs and provision for bad debts. Cost of service includes all costs of providing technical support, training, consulting, custom forms development application development services and provision for bad debts. Sales and marketing expenses are principally related to salaries and commissions paid to sales and marketing personnel and the cost of marketing programs. Research and development expenses include personnel and occupancy costs as well as the costs of software development, testing, product management, quality assurance and documentation. General and administrative expenses include personnel and occupancy costs related to administrative personnel. Depreciation and amortization includes depreciation of fixed assets and amortization of other assets, goodwill and distribution rights relating to various acquisitions. The Company amortizes goodwill and distribution rights over their expected useful lives. The Company periodically reviews the carrying value of its fixed assets and other assets. Any impairment in the carrying value is recognized at that time. 19 The following table sets forth, on a comparative basis for the periods indicated, the components of the Company's product margin, service margin and product and service margin:
Three months ended January 31, Nine months ended January 31, ----------------------------------------------- ------------------------------------------- 2002 2001 2002 2001 --------------------- ----------------------- ------------------- -------------------- (in thousands of Canadian dollars) (in thousands of Canadian dollars) Product revenue.... $ 13,167 100% $13,188 100% $ 32,310 100% $43,101 100% Cost of product.... 1,731 13% 1,910 14% 5,184 16% 6,042 14% ----------- ------- ------------ ------- --------- ------ --------- ------- Product margin..... 11,436 87% 11,278 86% 27,126 84% 37,059 86% =========== ======= ============ ======= ========= ====== ========= ======= Service revenue.... 12,178 100% 10,164 100% 36,902 100% 28,992 100% Cost of service.... 3,729 31% 2,766 27% 13,325 36% 8,052 28% ----------- ------- ------------ ------- --------- ------ --------- ------- Service margin..... 8,449 69% 7,398 73% 23,577 64% 20,940 72% =========== ======= ============ ======= ========= ====== ========= ======= Total revenue...... 25,345 100% 23,352 100% 69,212 100% 72,093 100% Costs of product and service 5,460 22% 4,676 20% 18,509 27% 14,094 20% ----------- ------- ------------ ------- --------- ------ --------- ------- Product and service margin $ 19,885 78% $18,676 80% $ 50,703 73% $57,999 80% =========== ======= ============ ======= ========= ====== ========= =======
The following table presents, for the periods indicated, consolidated statement of operations data expressed as a percentage of total revenues:
Three months ended Nine months ended January 31, January 31, -------------------------- ------------------------- 2002 2001 2002 2001 ------------ ----------- ------------ ---------- REVENUES Product................................ 52% 56% 47% 60% Service................................ 48% 44% 53% 40% ------------ ----------- ------------ ---------- 100% 100% 100% 100% ------------ ----------- ------------ ---------- COSTS AND EXPENSES Cost of product........................ 7% 8% 7% 8% Cost of service........................ 15% 12% 19% 11% Sales and marketing.................... 50% 56% 62% 53% General and administrative............. 11% 11% 13% 10% Research and development............... 16% 18% 20% 17% Depreciation and amortization.......... 11% 12% 12% 11% Takeover bid expenses.................. 18% - 7% - Gain on sale of assets................. - - 0% - ------------ ----------- ------------ ---------- 127% 117% 140% 111% ------------ ----------- ------------ ---------- OPERATING LOSS........................... -27% -17% -40% -11% Interest and other income (expense)...... 0% 1% 0% 1% ------------ ----------- ------------ ---------- LOSS BEFORE TAXES........................ -28% -16% -40% -10% Provision for income taxes............... -1% -1% -1% -1% ------------ ----------- ------------ ---------- NET LOSS................................. -28% -17% -40% -11% ============ =========== ============ ==========
20 The following table provides details of product revenue by geographic segment and, within Canada and the United States of America, by distribution channel:
Three months ended January 31, Nine months ended January 31, ----------------------------------------- -------------------------------------------- 2002 2001 Increase 2002 2001 Increase (Decrease) (Decrease) ---------- ---------- ------------ ------------ ----------- ------------ Product revenue by region United States and Canada.... $ 6,068 $ 7,024 -14% $ 15,901 $ 22,664 -30% Europe...................... 6,466 4,992 30% 13,982 14,370 -3% Rest of World............... 633 1,172 -46% 2,427 6,067 -60% ---------- ---------- ------------ ------------ ----------- ------------ $ 13,167 $ 13,188 0% $ 32,310 $ 43,101 -25% ========== ========== ============ ============ =========== ============ Product revenue by channel in North America End Users................... $ 4,764 $ 5,165 -8% $ 10,673 $ 13,718 -22% Reseller and OEM............ 1,304 1,859 -30% 5,228 8,946 -42% ---------- ---------- ------------ ------------ ----------- ------------ $ 6,068 $ 7,024 -14% $ 15,901 $ 22,664 -30% ========== ========== ============ ============ =========== ============
Three Months Ended January 31, 2002, Compared to Three Months Ended January 31, 2001 Revenues Total Revenues: Total revenues increased 9% to $25.3 million for the three months ended January 31, 2002, from $23.4 million for the three months ended January 31, 2001. Total revenues consisted of 52% product revenue and 48% service revenue for the three months ended January 31, 2002. Product Revenue: Product revenue was unchanged at $13.2 million for the three months ended January 31, 2002, and the three months ended January 31, 2001. Product revenue derived from North America, Europe and Rest of World represented 46%, 49% and 5%, respectively, of product revenue for the three months ended January 31, 2002, as compared to 53%, 38% and 9%, respectively, of product revenue for the three months ended January 31, 2001. Product revenue derived from North America decreased 14% to $6.1 million for the three months ended January 31, 2002, from $7.0 million for the three months ended January 31, 2001. Reseller and OEM sales, which represented 21% of North American product revenue, decreased 30% to $1.3 million for the three months ended January 31, 2002, from $1.9 million for the three months ended January 31, 2001 due primarily to lower than expected revenues from the United States Government sector and a large contract in the Financial Sector in Q3 of 2001 for which there was no comparative transaction in Q3 of 2002. Product revenue from direct sales, which represented 79% of North American product revenue, decreased 8% to $4.8 million for the three months ended January 31, 2002, from $5.2 million for the three months ended January 31, 2001. Product revenue derived from Europe increased 30% to $6.5 million for the three months ended January 31, 2002, from $5.0 million for the three months ended January 31, 2001, due to increased license revenue from the United Kingdom. The increase in our United Kingdom operation's revenue was primarily due to a large financial contract that contributed $2.9 million of product revenue. There was no comparative deal in the three months ended January 31, 2001. Product revenue derived from Rest of World decreased 46% to $633,000 for the three months ended January 31, 2002, from $1.2 million for the three months ended January 31, 2001, primarily due to decreased reseller revenue from Japan and China. 21 Service Revenue: Service revenue increased 20% to $12.2 million for the three months ended January 31, 2002, from $10.2 million for the three months ended January 31, 2001. For the three months ended January 31, 2002, maintenance and support revenue increased 12% to $8.0 million from $7.1 million for the three months ended January 31, 2001. This increase resulted from continued growth in the company's overall maintenance and support base which results from continued sales of new maintenance and support contracts as well as the renewal of existing contracts. The Company's consulting revenue increased 38% to $4.2 million for the three months ended January 31, 2002, from $3.0 million for the three months ended January 31, 2001. For the past year, the Company has been strengthening its capacity to win and provide consulting business by increasing the size of its sales force and the number of consultants dedicated to earning consulting revenue for the Company. This has resulted in an increase in consulting revenue. Costs and Expenses Total Costs and Expenses: Total costs and expenses were $32.3 million for the three months ended January 31, 2002, an increase of 18% from $27.3 million for the three months ended January 31, 2001. This increase was primarily due to the costs associated with retaining CIBC World Markets, and legal and accounting fees to address the unsolicited bid by OpenText Corporation. In a move to reduce its cost base while also preserving the intellectual talent of the Company, Accelio implemented a Global salary reduction program of 10% for all employees earning $60,000 or higher. Employees earning less than $60,000 received a 5% reduction. This initiative is currently for six months but may be extended to twelve months and commenced during the quarter ended January 31, 2002. The reduction applied to every employee, where legally applicable geographically, including the Board of Directors, the executive officers and the Chief Executive Officer. The Company cancelled all executive bonus plans for the third and fourth quarters, unless it meets its profit target. The Company did not meet the target for the third quarter ended January 31, 2002. The Company also eliminated a total of 50 positions. All employees received statutory notice of this change in salary in accordance with employment law. Employees were granted stock options on a prorated basis with the salary reduction. The grant was based on the amount of the salary reduction divided by 4. For example, an employee with a salary of $60,000 would multiply the salary times 10% ($6,000) divided by two ($3,000) divided by 4 equals number of options granted of 750. The vesting period for these options is 2/3 at one year from the date of grant and the remaining 1/3 after eighteen months of grant date. The Company granted approximately 500,000 options to employees pursuant to this arrangement. These measures have contributed to reducing overall employee costs in the three months ended January 31, 2002 by approximately $3.2 million dollars from the three months ended October 31, 2001. Cost of Product: Cost of product decreased 9% to $1.7 million for the three months ended January 31, 2002, from $1.9 million for the three months ended January 31, 2001. These costs represent 13% and 14% of product revenue for the three months ended January 31, 2002 and January 31, 2001, respectively. The decrease is related to a decrease in amortization of capitalized software costs. During fiscal year 2001, the company wrote down the value of certain capitalized software costs. The write-down was attributable to management's analysis that the life cycles of some of its products had come to an end. Total capitalized software costs charged to cost of product revenue decreased 80% to $161,000 for the three months ended January 31, 2002, from $814,000 for the three months ended January 31, 2001. Total bad debt expense decreased 37% to $615,000 for the three months ended January 31, 2002, from $980,000 for the three months ended January 31, 2001. Cost of Service: Cost of service increased 35% to $3.7 million for the three months ended January 31, 2002, from $2.8 million for the three months ended January 31, 2001 due to the company's increasing consulting revenue in addition to the number of resources dedicated to consulting and customer support activities. The service margin decreased to 69% for the three months ended January 31, 2002, from 73% for the three months ended January 31, 2001. Sales and Marketing: Sales and marketing expenses decreased 3% to $12.8 million for the three months ended January 31, 2002 from $13.1 million for the three months ended January 31, 2001, primarily due to lower travel and recruiting fees as a result of the Company's increased cost management efforts. As a percentage of total revenues, sales and marketing decreased to 50% for the three months ended January 31, 2002, from 56% for the three months ended January 31, 2001. 22 General and Administrative: General and administrative expenses increased 6% to $2.7 million for the three months ended January 31, 2002, from $2.6 million for the three months ended January 31, 2001. As a percentage of total revenues, general and administrative expenses remained constant at 11% for the three months ended January 31, 2002, and the three months ended January 31, 2001. Research and Development: Research and development expenses decreased 4% to $4.1 million for the three months ended January 31, 2002, from $4.2 million for the three months ended January 31, 2001, primarily due to lower overall costs incurred as a result of the Company's increased cost management, and the implementation of the Global salary reduction program of 10% for all employees earning $60,000 or higher. During the three months ended January 31, 2002, the Company did not capitalize any costs related to software development as compared to $971,000 for the three months ended January 31, 2001. Software development costs are expensed as incurred unless they meet generally accepted accounting criteria for deferral and amortization. Costs were not deferred in the quarter ended January 31, 2002 to the extent they were for the quarter ended January 31, 2001 because fewer projects met the criteria for deferral and where projects did meet the criteria the period between achieving technological feasibility and the general availability of the product was short and the associated costs were minimal. Research and development expense as a percentage of product revenue decreased to 31% for the three months ended January 31, 2002, from 32% for the three months ended January 31, 2001. Depreciation and Amortization: Depreciation and amortization remained at $2.7 million for the three months ended January 31, 2002, and the three months ended January 31, 2001. Takeover defence costs: The expense of $4.5 million was due to the costs associated with retaining CIBC World Markets, and legal and accounting fees to address the unsolicited bid by OpenText Corporation. Operating Loss: Operating loss was $6.9 million for the three months ended January 31, 2002, compared to an operating loss of $3.9 million for the three months ended January 31, 2001. The increase in operating loss is due to the factors discussed above. Net Investment and Other Income (Expense): Net investment and other expense was approximately $95,000 for the three months ended January 31, 2002, compared to other income of $264,000 for the three months ended January 31, 2001. The decrease is due to the decrease in cash and cash equivalents and the lower interest return on investments. Provision for Income Taxes: During the quarter ended January 31, 2002, the Company recorded a provision for domestic capital taxes and foreign jurisdiction income tax of $140,000, compared to $201,000 for the three months ended January 31, 2001. Nine Months Ended January 31, 2002, Compared to Nine Months Ended January 31, 2001 Revenues Total Revenues: Total revenues decreased 4% to $69.2 million for the nine months ended January 31, 2002, from $72.1 million for the nine months ended January 31, 2001. Total revenues consisted of 47% product revenue and 53% service revenue for the nine months ended January 31, 2002. Product Revenue: Product revenue decreased 25% to $32.3 million for the nine months ended January 31, 2002, from $43.1 million for the nine months ended January 31, 2001. Product revenue derived from North America, Europe and Rest of World represented 49%, 43% and 8%, respectively, of product revenue for the nine months ended January 31, 2002, as compared to 53%, 33% and 14%, respectively, of product revenue for the nine months ended January 31, 2001. Product revenue derived from North America decreased 30% to $15.9 million for the nine months ended January 31, 2002, from $22.7 million for the nine months ended January 31, 2001. Reseller and OEM sales, which represented 33% of North American product revenue, decreased 42% to $5.2 million for the nine months ended 23 January 31, 2002, from $8.9 million for the nine months ended January 31, 2001 due primarily to the economic slowdown in North America and lower than expected revenues from the United States Government. Product revenue from direct sales, which represented 67% of North American product revenue, decreased 22% to $10.7 million for the nine months ended January 31, 2002, from $13.7 million for the nine months ended January 31, 2001. Product revenue derived from Europe decreased 3% to $14.0 million for the nine months ended January 31, 2002, from $14.4 million for the nine months ended January 31, 2001, due to a decline in license revenue from France. Product revenue derived from Rest of World decreased 59% to $2.5 million for the nine months ended January 31, 2002, from $6.1 million for the nine months ended January 31, 2001, primarily due to decreased reseller revenue from Japan and Australia. Service Revenue: Service revenue increased 27% to $36.9 million for the nine months ended January 31, 2002, from $29.0 million for the nine months ended January 31, 2001. For the nine months ended January 31, 2002, maintenance and support revenue increased 13% to $23.0 million from $20.3 million for the nine months ended January 31, 2001. The Company's consulting revenue increased 61% to $13.9 million for the nine months ended January 31, 2002, from $8.6 million for the nine months ended January 31, 2001. For the past year, the Company has been strengthening its capacity to win and provide consulting business by increasing the size of its sales force and the number of consultants dedicated to earning consulting revenue for the Company. This has resulted in an increase in consulting revenue. Costs and Expenses Total Costs and Expenses: Total costs and expenses were $96.9 million for the nine months ended January 31, 2002, an increase of 21% from $79.9 million for the nine months ended January 31, 2001. Cost of Product: Cost of product decreased 14% to $5.2 million for the nine months ended January 31, 2002, from $6.0 million for the nine months ended January 31, 2001. These costs represent 16% and 14% of product revenue for the nine months ended January 31, 2002 and January 31, 2001, respectively. The decrease is related to a decrease in amortization of capitalized software costs. During fiscal year 2001, the company wrote down the value of certain capitalized software costs. The write-down was attributable to management's analysis that the life cycles of some of its products had come to an end. Total capitalized software costs charged to cost of product revenue decreased 75% to $597,000 for the nine months ended January 31, 2002, from $2.4 million for the nine months ended January 31, 2001. Total bad debt expense decreased 38% to $1.5 million for the nine months ended January 31, 2002, from $2.4 million for the nine months ended January 31, 2001. Cost of Service: Cost of service increased 65% to $13.3 million for the nine months ended January 31, 2002, from $8.1 million for the nine months ended January 31, 2001 due to the company's increasing consulting revenue in addition to the number of resources dedicated to consulting and customer support activities. The service margin decreased to 64% for the nine months ended January 31, 2002, from 72% for the nine months ended January 31, 2001. Sales and Marketing: Sales and marketing expenses increased 11% to $42.9 million for the nine months ended January 31, 2002 from $38.5 million for the nine months ended January 31, 2001, as a result of the company's expansion of its worldwide sales force. As a percentage of total revenues, sales and marketing increased to 62% for the nine months ended January 31, 2002, from 53% for the nine months ended January 31, 2001. General and Administrative: General and administrative expenses increased 20% to $8.8 million for the nine months ended January 31, 2002, from $7.3 million for the nine months ended January 31, 2001. As a percentage of total revenues, general and administrative expenses increased to 13% for the nine months ended January 31, 2002, from 10% for the nine months ended January 31, 2001. Research and Development: Research and development expenses increased 15% to $14.1 million for the nine 24 months ended January 31, 2002, from $12.2 million for the nine months ended January 31, 2001, primarily due to a reduction in the amount of capitalized software costs. During the nine months ended January 31, 2002, the Company did not capitalize any costs related to software development as compared to $2.7 million for the nine months ended January 31, 2001. Software development costs are expensed as incurred unless they meet generally accepted accounting criteria for deferral and amortization. Costs were not deferred in the nine months ended January 31, 2002 to the extent they were for the nine months ended January 31, 2001 because fewer projects met the criteria for deferral and where projects did meet the criteria the period between achieving technological feasibility and the general availability of the product was short and the associated costs were minimal. Research and development expense as a percentage of product revenue increased to 44% for the nine months ended January 31, 2002, from 28% for the nine months ended January 31, 2001. Depreciation and Amortization: Depreciation and amortization increased 6% to $8.2 million for the nine months ended January 31, 2002 compared to $7.8 million for the nine months ended January 31, 2001. Takeover defence costs: The expense of $4.5 million was due to the costs associated with retaining CIBC World Markets, and legal and accounting fees to address the unsolicited bid by OpenText Corporation. Operating Loss: Operating loss was $27.7 million for the nine months ended January 31, 2002, compared to an operating loss of $7.8 million for the nine months ended January 31, 2001. The increase in operating loss is due to the factors discussed above. Net Investment and Other Income (Expense): Net investment and other income was approximately $263,000 for the nine months ended January 31, 2002, compared to $716,000 for the nine months ended January 31, 2001. The decrease is due to the decrease in cash and cash equivalents and the lower interest return on investments. Provision for Income Taxes: The Company recorded a provision for domestic capital taxes and foreign jurisdiction income tax of $402,000 during the nine months ended January 31, 2002, compared to $860,000 for the nine months ended January 31, 2001. Liquidity and Capital Resources As at January 31, 2002, and April 30, 2001, the Company had $28.2 million and $41.4 million of cash and cash equivalents respectively. During the nine months ended January 31, 2002, the Company's cash and cash equivalents decreased by approximately $13.3 million. The decrease is primarily due to the Company's use of cash to fund current operations, the purchase of fixed and other assets, the repayment of certain capital lease obligations, offset by a decrease in accounts receivable. The Company believes that its existing cash and cash equivalents will provide sufficient liquidity to meet the Company's business requirements in the near term. However, should the Company continue to incur operating losses, its ability to meet its liquidity requirements and to raise additional capital through debt or equity financing may be compromised. 25 Future Payments Future payments due under debt and lease obligations as of January 31, 2002:
RBC term Capital Operating Property Fiscal year loan leases leases leases Total ------------------------ ------------ -------- ----------- ------------- ----------- (in thousands of Canadian dollars) 2002 $ 10,000 $ 285 $186 $ 1,765 $12,236 2003 - 1,090 52 5,940 7,082 2004 - 706 - 5,527 6,233 2005 - 42 - 5,397 5,439 2006 and beyond - - - 14,381 14,381 ------------ -------- ----------- ------------- ----------- Total $ 10,000 $ 2,123 $238 $ 33,010 $45,371 ============ ======== =========== ============= ===========
Operations The Company decreased its investment in the non-cash operating components of working capital during the nine months ended January 31, 2002, by approximately $11.2 million primarily due to a decrease in accounts receivable. The decrease in accounts receivable is related to the improvement in DSO (days sales outstanding) and the Company's decline in revenue. The Company purchased approximately $2.9 million of fixed assets in the nine months ended January 31, 2002 including computer hardware, office equipment, furniture, and leasehold improvements. During the nine months ended January 31, 2002, the Company invested $3.0 million in other assets related primarily to the purchase of software. During the nine months ended January 31, 2002, the Company generated cash of approximately $351,000 relating to the Company's stock purchase plan. Accounts Receivable and Term Accounts Receivable: Total accounts receivable and term accounts receivable decreased $12.3 million to $20.1 million at January 31, 2002 from $32.5 million at April 30, 2001, primarily due to the Company's continued focus on collections. Accounts receivable excluding term accounts receivable decreased to $18.3 million at January 31, 2002, from $28.5 million at April 30, 2001. Term accounts receivable, which are accounts receivable with contracted payment dates exceeding the Company's customary trade terms, decreased by $2.8 million to $1.2 million for the nine months ended January 31, 2002, from $4.0 million on April 30, 2001 due to a reduction in the Company's practice of granting extended payment terms. The Company records revenues from irrevocable commitments to purchase products which do not conform to the Company's customary trade terms at the minimum amount receivable less deemed interest ("Term Accounts Receivable"). The Company's Irrevocable Commitment Licenses ("ICLs") are arrangements to use multiple copies of a software product under site licenses with users and to market multiple copies of a software product under similar arrangements with resellers. These arrangements always include post-contract customer support ("PCS") and are typically less than a year in duration with a significant portion of the product license fee payable within the Company's normal trade terms. License revenue from arrangements having extended payment term were $477,000 for the three months ended January 31, 2002, and $1.1 million for the nine months ended January 31, 2002. For the three months ended January 31, 2002, the discount rate used was 6.5%. Payment of Term Accounts Receivable is generally due the earlier of: (i) delivery of the Company's products by the customer to its customers or end users; and (ii) specific dates in the license agreement ("Minimum Payment Dates"). Restructuring 26 On March 17, 1999, the Corporation announced a restructuring plan and recorded a provision for restructuring costs of $30.5 million directed at reducing costs. The key restructuring actions included: o Consolidation of management responsibilities and reduction in headcount; o Closure of redundant facilities; o Reduction in the carrying value of certain capital assets primarily related to past acquisitions; and o Cancellation of certain commitments and other costs. The following table summarizes the activity in the restructuring costs during the three months ended January 31, 2002:
Employee Total Non Cash Total Termination Facilities Other Costs Costs Provision -------------- ----------- ---------- ----------- ------------ ------------ Restructuring provision........... $ 5,252 $2,914 $726 $8,892 $21,611 $ 30,503 Cash payments..................... (1,175) (36) (207) (1,418) -- (1,418) Non-cash items.................... -- -- -- -- (21,611) (21,611) -------------- ----------- ---------- ----------- ------------ ------------ Balance, April 30, 1999........... $ 4,077 $2,878 $519 $7,474 $ -- $ 7,474 Cash payments..................... (2,921) (1,092) (124) (4,137) -- (4,137) Reductions........................ (566) (540) -- (1,106) -- (1,106) -------------- ----------- ---------- ----------- ------------ ------------ Balance, April 30, 2000........... $ 590 $1,246 $395 $2,231 $ -- $ 2,231 Cash payments..................... (468) (236) (121) (825) -- (825) Reductions........................ (122) (567) -- (689) -- (689) -------------- ----------- ---------- ----------- ------------ ------------ Balance, April 30, 2001........... $ -- $ 443 $274 $ 717 $ -- $ 717 Cash payments..................... -- (88) (40) (128) -- (128) Reductions........................ -- -- -- -- -- -- -------------- ----------- ---------- ----------- ------------ ------------ Balance, July 31, 2001............ $ -- $ 355 $234 $ 589 $ -- $ 589 Cash payments..................... -- (8) (41) (49) -- (49) Reductions........................ -- -- -- -- -- -- -------------- ----------- ---------- ----------- ------------ ------------ Balance, October 31, 2001......... $ -- $ 347 $193 $ 540 $ -- $ 540 Cash payments..................... -- (49) (42) (91) -- (91) Reductions........................ -- -- -- -- -- -- -------------- ----------- ---------- ----------- ------------ ------------ Balance, January 31, 2002......... $ -- $ 298 $ 151 $ 449 $ -- $ 449 ============== =========== ========== =========== ============ ============ Long-term balance................. $ -- $ 249 $ -- $ 249 $ -- $ 249 ============== =========== ========== =========== ============ ============
Employee terminations totaled 105 and included 46 in sales and marketing, 40 in research in development, 12 in internal corporate services, and 7 in systems and consulting services. Employee terminations included salary continuance for which the Company was contractually obligated to pay. All employees were terminated on or before April 30, 1999. Facilities costs consisted primarily of $2.1 million and $780,000 related to the closure of the Company's United Kingdom and Toronto facilities, respectively. The provision for redundant facilities included management's best estimates of the total future operating costs of these vacant facilities for the remainder of their respective lease terms. Actual costs could differ from these estimates. During the nine months ended January 31, 2002, the Company's liability for vacant facilities was reduced by $145,000. The Company's long-term balance relates to a lease in the United Kingdom which expires April 30, 2010. Other cash costs related primarily to the cancellation of trade shows and other commitments. The remaining obligation relates to a service contract which expires August 31, 2002. During the nine months ended January 31, 2002, the Company's liability related to this commitment was reduced by $123,000. Non-cash costs included impairment losses of $21.6 million related to assets held for use. The losses were comprised of $16.6 million related to marketing and distribution rights, $3.1 million related to goodwill and $1.9 million related to other capital assets. 27 Financial Instruments and Credit Facility The Company has entered into receivable purchase agreements with certain third party purchasers. Under the agreements, the Company has the option to sell certain accounts receivable on a recourse basis. The Purchasers have recourse in the event of a trade dispute as defined in the receivables purchase agreements. As at January 31, 2002 and April 30, 2001, the outstanding balance of accounts receivable sold under these agreements was approximately US$2.6 million and US$3.6 million, respectively. The recourse obligation is estimated to be nil as the Company believes that none of the receivables sold are at risk of recourse. The Company has a committed $20 million credit facility with the Royal Bank of Canada ("RBC"). This credit facility is made up of (i) a $10 million term loan facility which bears interest at a rate of RBC prime plus 2.25% and is payable on August 1, 2002 and (ii) a $10 million operating facility that bears interest at a rate of RBC prime plus 1%. The credit facility is in effect until August 1, 2002. As at January 31, 2002, the Company had drawn all of the $10 million term loan facility and fixed the interest rate until April 17, 2002, at 1.98%. The Company had no borrowings against its operating facility at January 31, 2002. The Company has granted, as collateral for the $20 million credit facility, a general security interest in Accelio's assets, including assignment of receivables insurance and a pledge of the shares of certain subsidiaries. When the Company deems appropriate, Accelio uses forward contracts and purchased options to manage exposures to foreign exchange. The Company's objective is to minimize risk using the most effective methods to eliminate or reduce the impacts of this exposure. Accelio does not enter into financial instruments for speculative or trading purposes. As at January 31, 2002, the Company had no outstanding foreign exchange financial instruments. Critical Accounting Policies and Estimates The Company's discussion and analysis of its financial condition and results of operations are based upon the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires Accelio to make estimates and judgements that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, Accelio evaluates its estimates including those related to product returns, bad debts, inventories, investments, intangible assets, income taxes, financing operations, warranty obligations, restructuring, contingencies, and litigation. Accelio bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgements about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Accelio believes the following critical accounting policies affect its more significant judgements and estimates used in the preparation of its consolidated financial statements: (1) Revenue recognition The Company recognizes revenue in accordance with Statement of Position ("SOP") 97-2, "Software Revenue Recognition," issued by the American Institute of Certified Public Accountants ("AICPA"), SOP 98-9, "Modification of 97-2, Software Recognition with Respect to Certain Transactions" and Staff Accounting Bulletin (SAB) No. 101 "Revenue Recognition in Financial Statements", issued by the Securities and Exchange Commission (SEC). 28 (a) Product Revenue The Company records product revenue from packaged software and irrevocable commitments to purchase products when persuasive evidence of an arrangement exists, the software product has been shipped, there are no significant uncertainties surrounding product acceptance, the fees are fixed and determinable and collection is considered probable. At the time of contract signing, we assess whether the fee associated with our revenue transactions is fixed and determinable. We assess whether the fee is fixed and determinable based on the payment terms associated with the transaction. We consider the fee to be fixed and determinable if it is due within our normal payment terms, which are 30 to 90 days from invoice date. In certain specific cases, we accept payment terms that stretch beyond our normal payment terms but are under a year in length. This only occurs under Irrevocable Commitment Licenses ("ICLs"). The Company uses ICLs to recognize revenue from arrangements with users or original equipment manufacturers ("OEM") when the risk of obsolescence is low as: (1) the software is mission critical software to the user; or (2) the software is embedded in the software of the OEM. In addition, the Company always sells post-contract customer support ("PCS") with ICL's. These PCS arrangements include the right to unspecified future upgrades. Accordingly, the Company believes the risk that the product's value will decline over the term of the agreement is low. The Company has a history of collecting all amounts due under the original terms of its ICLs. The Company does not have a history of granting concessions, including but not limited to those that would reduce an arrangement fee or extend the terms of payment or increase the deliverables under such arrangements. If it cannot be concluded that a fee is fixed or determinable at the outset of an arrangement, revenue is recognized as payments from customers become due, assuming all other conditions for revenue recognition have been satisfied. We assess collection based on a number of factors, including past transaction history with the customer and the credit-worthiness of the customer. We do not request collateral from our customers. If we determine that collection of a fee is not reasonably assured, we defer the fee and recognize revenue at the time collection becomes reasonably assured, which is generally upon receipt of cash. The Company uses binding purchase orders and signed license agreement as evidence of an arrangement. Our arrangements do not generally include acceptance clauses. However, if an arrangement includes an acceptance provision, acceptance occurs upon the earlier of receipt of a written customer acceptance or expiration of the acceptance period. Revenues from ICLs to purchase products with payment terms exceeding the Company's customary trade terms are recorded at the amount receivable less deemed interest. The Company amortizes the difference between the face value of the receivable and the discounted amount over the term of the receivable and records the discount as interest income. The Company estimates its implied discounted interest rate in order to make this determination based on credit ratings of the individual customers. For all arrangements with multiple obligations (i.e. PCS) we allocate revenue to each component of the arrangement using the residual value method based on the fair value of the undelivered elements, which is specific to the Company. This means that we defer revenue from the arrangement fee equivalent to the fair value of the undelivered elements. Fair values for the ongoing PCS obligations are based upon our analysis of maintenance and support renewal pricing. Fair value of consulting is based upon separate sales by us of these services to other customers. b) Post-contract Customer Support Revenue The Company enters into arrangements that always include PCS. Revenue from PCS is recognized ratably over the term of the agreement. Unearned revenue represents payments received from customers for services not yet performed. c) Consulting Revenue 29 Revenue from software product licenses which include significant customization and revenue from services are recognized on a percentage of completion basis, whereby revenue is recorded, based on labor input hours, at the estimated realizable value of work completed to date. Recognition of revenue for these fixed price contracts rely on estimates of labor input hours incurred to date as well as the total estimated labor input hours for the project at hand. Estimated losses on contracts are recognized when they become probable. Unbilled receivables represent consulting work performed under contract and not yet billed. The Company follows this method since reasonably dependable estimates of the revenue, labor input hours and costs applicable to various stages of a contract can be made. (2) Allowance for Doubtful Accounts The Company reviews its accounts receivable and evaluates the adequacy of its allowance for doubtful accounts. Specific items that are analyzed include historical bad debts, changes in customer payments and current economic trends. (3) Intangible Assets and Goodwill The Company assesses the impairment of identifiable intangibles, long-lived assets and related goodwill whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Future adverse changes in market conditions or poor operating results of the underlying investments could result in losses or an inability to recover the carrying value of the investments that may not be reflected in an investment's carrying value, thereby, possibly requiring an impairment charge in the future. (4) Determining Functional Currencies for Purposes of Consolidating International Operations In preparing the Company's consolidated financial statements, we are required to translate the financial statements of the foreign subsidiaries from the currency in which they keep their accounting records, their local currency, into Canadian dollars. This process results in exchange gains and losses which, under the relevant accounting guidance are either included within the statement of operations or as a separate part of our net equity under the caption "cumulative translation adjustment". Under the relevant accounting guidance the treatment of these translation gains or losses is dependent upon management's determination of the functional currency of each subsidiary. The functional currency is based upon management's judgment and involves consideration of all relevant economic facts and circumstances affecting the subsidiary. Generally, the currency in which the subsidiary transacts a majority of its transactions would be considered the functional currency but any dependency upon the parent and the nature of the subsidiary's operations must also be considered. The Company has determined that the functional currency of its subsidiaries is the local currency, and as such, any gain or loss associated with the translation is included in cumulative translation adjustments. However, if the functional currency was not the local currency, any gain or loss associated with the translation of the financial statements would be included within the Company's statement of operations after the date of the change. If the Company's assessment of the functional currency were to change for one or more of its subsidiaries, this would impact the Company's consolidated statement of operations in future periods. 30 (5) Income Tax Reserves The Company has net deferred tax assets, the principal components of which are temporary differences associated with the acquisition of in process research and development and operating loss carry forwards. The Company believes sufficient uncertainty exists regarding the realizability of these net deferred tax assets such that a valuation allowance has been taken on the entire amount. Assumptions regarding the realizability of these net deferred tax assets are revisited at each balance sheet date. Any changes in the Company's overall operating environment and financial performance could result in adjustments to the valuation allowance. (6) Costs of Computer Software to be Sold Costs related to the development of proprietary software are expensed as incurred unless the costs relate to technically feasible and complete products and can reasonably be regarded as assured of recovery through future revenues in which case the costs are deferred and amortized. Annual amortization is computed using the greater of (i) the ratio of the product's current gross revenues to the total of current and expected gross revenues or (ii) the straight-line method computed by dividing the remaining unamortized capitalized cost by the estimated remaining economic life of the product, not to exceed three years. At each balance sheet date, the unamortized capitalized costs are compared to the net realizable value of the product. If there is an excess in capitalized costs, this excess is written off in the period. Recent Accounting Pronouncements On October 3, 2001 the Financial Accounting Standards Board (FASB) issued Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, that replaces FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of and APB Opinion No. 30, Reporting Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, for the disposal of segments of business. Statement 144 requires that those long-lived assets be measured at the lower of carrying amount or fair value less cost to sell, whether reported in continuing operations or in discontinued operations. Therefore, discontinued operations will no longer be measured at net realizable value or include amounts for operating losses that have not yet occurred. The provisions of Statement 144 are effective for financial statements issued or fiscal years beginning after December 15, 2001 and, generally, are to be applied prospectively. This pronouncement will be effective for the Company's fiscal year beginning May 1, 2002. Management believes the adoption of SFAS No. 144 will not have a significant impact on the Company's financial condition or results of operations. In July 2001, the Financial Accounting Standards Board ("FASB") has issued the Statement of Financial Standards ("SFAS") No.141, Business Combinations, that will require all business combinations to use the purchase method of accounting. This pronouncement is effective for all business combinations initiated after June 30, 2001. The FASB has also issued SFAS No. 142, Goodwill and Other Intangible Assets, which will require intangible assets with an indefinite life and goodwill to be tested for impairment on an annual basis. Goodwill and indefinite life intangibles will no longer be amortized. Intangible assets with a definite life will continue to be amortized over their useful life. This pronouncement will be effective for the Company's fiscal year beginning May 1, 2002. Management believes the adoption of SFAS No. 141 and SFAS No. 142 will not have a significant impact on the Company's financial condition or results of operations. In June 1998, the FASB issued the Statement of Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). This statement establishes accounting and reporting standards for derivative instruments and hedging activities and is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. In June 1999, the FASB issued SFAS No.137, which delays the effective date of SFAS 133 until fiscal years beginning after June 15, 2000. Currently, as the Company has no derivative instruments, the adoption of SFAS No. 133 has had no impact on the Company's financial condition or results of operations. 31 PART II -- OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is not a party to any material legal proceeding. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K During the three months ended January 31, 2002, the Company filed the following reports on Form 8-K; o Report on Form 8-K dated November 26, 2001, regarding the appointment of Trey Graham to Senior Vice President and Chief Financial Officer o Report on Form 8-K dated December 17, 2001, regarding the unsolicited bid from Open Text to acquire all the outstanding common shares of the Company o Report on Form 8-K dated December 18, 2001, pursuant to the Company's hiring of CIBC World Markets to act as its financial advisor in response to the unsolicited bid from Open Text to acquire all the outstanding common shares of the Company o Report on Form 8-K dated January 7, 2002, pursuant to the announcement that the Company's Board of Directors unanimously rejected the unsolicited tender offer by Open Text Corporation to acquire all of the Company's outstanding shares o Report on Form 8-K dated January 11, 2002, pursuant to the announcement by the Company as to the primary reasons for rejecting the Open Text bid o Report on Form 8-K dated January 30, 2002, pursuant to the announcement by the Company announced that it has received several proposals to acquire all of its issued and outstanding shares, each proposal being for a price per share that is higher than that of the unsolicited tender offer made by Open Text Corporation o Report on Form 8-K dated February 1, 2002, pursuant to the announcement by the Company that Adobe has agreed to acquire all outstanding shares of the Company for approximately CDN $4.50 per share, payable in Adobe shares valued at US$72.0 million 32 SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Accelio Corporation March 11, 2002 By: /s/ A. Kevin Francis - -------------- --------------------------------------------- Date A. Kevin Francis President and Chief Executive Officer and Director (Principal Executive Officer) March 11, 2002 By: /s/ Leonard (Trey) Graham III - -------------- --------------------------------------------- Date Leonard (Trey) Graham III Senior Vice President, Finance and Chief Financial Officer (Principal Financial and Accounting Officer) 33 -----END PRIVACY-ENHANCED MESSAGE-----