-----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, Nac9YrEZcw4pduFmJlztOkEuW6qg9TNVVK0dgTvq6naPWTxkPkG8/cGVi4n8O9Lu Nd2FmrAnax7HWGcKZdV9Kg== 0001045969-99-000516.txt : 19990714 0001045969-99-000516.hdr.sgml : 19990714 ACCESSION NUMBER: 0001045969-99-000516 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19990328 FILED AS OF DATE: 19990713 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CARLETON CORP CENTRAL INDEX KEY: 0000351139 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER COMMUNICATIONS EQUIPMENT [3576] IRS NUMBER: 411349953 STATE OF INCORPORATION: MN FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-12378 FILM NUMBER: 99663625 BUSINESS ADDRESS: STREET 1: 10729 BREN RD EAST CITY: MINNETONKA STATE: MN ZIP: 55343 BUSINESS PHONE: 6128280300 MAIL ADDRESS: STREET 1: 10729 BREN RD EAST CITY: MINNETONKA STATE: MN ZIP: 55343 FORMER COMPANY: FORMER CONFORMED NAME: APERTUS TECHNOLOGIES INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: LEE DATA CORP DATE OF NAME CHANGE: 19900815 10-K405 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K405 (X) Annual report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended March 28, 1999, or ( ) Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 for the period from ______________ to ______________. Commission file number: 0-12378 ------- CARLETON CORPORATION -------------------- (Exact name of registrant as specified in its charter) Minnesota 41-1349953 ------------------------------- ------------------ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 10729 Bren Road East Minnetonka, Minnesota 55343 ------------------------------- -------------- (Address of principal executive (ZIP Code) offices) Registrant's telephone number, including area code: (612) 238-4000 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.25 per share Common Stock purchase rights Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- ___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this From 10-K or any amendment to this Form 10-K (X). The aggregate market value of voting stock held by non-affiliates of the registrant as of July 2, 1999 was approximately $6,681,184 (based on the last sale price of $2.0469 per share as reported by The Nasdaq National Market). As of July 2, 1999, 3,346,244 shares of the registrant's Common Stock, par value $.25 per share, were issued and outstanding. DOCUMENTS INCORPORATED BY REFERENCE Part II of this Form 10-K incorporates by reference information from the registrant's Annual Report to Shareholders for the year ended March 28, 1999 (the "Annual Report to Shareholders"), copies of which were filed with the Commission on July 13, 1999. Part III of this Form 10-K incorporates by reference information from the registrant's Proxy Statement for its 1999 Annual Meeting of Shareholders (the "Proxy Statement"), which is to be filed with the Commission on or before July 26, 1999. -1- Part I Item 1. Business Carleton Corporation (the "Company") delivers data integration software and services that enable large organizations to rapidly deploy business-critical applications, such as customer relationship management (CRM) systems, data warehouses, data marts and new packaged applications. Industry analysts estimate that the data preparation process--including data extraction, transformation, cleansing, integration, dimensioning and aggregating--represents as much as 60- 80% of the deployment costs of a data warehouse. The Company's solutions provide unparalleled capability in automating these critical data preparation processes, resulting in faster application development, improved data quality, lower implementation costs, and reduced overall project risk. Our corporate tag line "Pure data Pure results" captures our expertise and focus on data integration along with our commitment to our customer's success. The Company, a Minnesota corporation, was incorporated in March 1979. As used herein, the "Company" and "Carleton" refer to Carleton Corporation together with its wholly owned subsidiaries. Market Background Leading organizations worldwide are focused on improving their relationships with customers as a means to differentiate from their competitors, increase customer loyalty, and increase profitability. A key element of these strategies are new CRM applications and related customer analytical applications that enable the organization to successfully integrate the customer-driven strategy into the day-to-day operations of the business. A critical success factor for these applications is detailed knowledge of individual customers and their relationships with the organization. Unfortunately, customer data in most organizations is distributed across many diverse systems in many different forms. In fact, most organizations have no real knowledge of who their customers are at all. The success of the customer relationship management strategy depends on the ability to integrate these diverse sources into meaningful customer information. Target Market The Company's products are marketed to data-intensive Fortune 1000 companies that are building data warehouses or converting to new packaged applications. The companies have complex environments that require significant data re- engineering to create reliable and useable information for business analysis. Many of the Company's customers are in the insurance, manufacturing, financial and telecommunications marketplace. The Company distributes its products primarily in North America through direct sales and channel partners, including value added resellers and systems integrators. Products The Company delivers data integration software and services that enable large organizations to rapidly deploy business-critical applications, such as customer relationship management systems (CRM), data warehouses, data marts and new packaged applications. The Company's products automate data preparation processes, resulting in faster application development, improved data quality and lower implementation costs. The Company previously developed and sold two major products: Passport and Enterprise Integrator. The Company recently announced its new Pure.View(TM) product suite, which includes the former Passport under the name Pure.Extract(TM) and the former Enterprise Integrator under the name Pure.Integrate(TM). The individual products included in the Pure.View(TM) product suite can be purchased as standalone products or in any combination that meets the customer's needs. A description of the Company's products is as follows: . Pure.View(TM) - a comprehensive solution for active customer data management. It addresses the full range of data preparation needs for customer-centric data warehouses and CRM systems. Pure.View creates a clean, -2- . integrated view of customer data, distributes the data for decision-making, and synchronizes back to operational systems for closed-loop marketing. . Pure.Extract(TM) - easy-to-use, high performance native database extraction tool used to prepare data for business-critical applications. It simplifies extracting data from a broad range of mainframe corporate databases and speeds the data extraction process for high volumes of operational data. . Pure.Integrate(TM) - an advanced transformation and cleansing tool that enables data warehouse developers to create integrated views of important business information, such as customers, products and suppliers, from disparate data sources. Its unique strengths include sophisticated matching and consolidation, powerful data cleansing, and intelligent incremental updates to the data warehouse. . Pure.Name Pure.Address(TM) Customer Data Quality Option for Pure.Integrate - advanced name and address cleansing, which improves the accuracy and business value of customer data. With the Pure.Name Pure.Address option, Pure.Integrate provides a cost-effective and comprehensive solution for creating customer-centric data warehouses or data marts. . Pure.Dimension(TM) - high performance tool that dramatically simplifies the dimensioning, aggregating and loading data into OLAP data marts. Pure.Dimension provides a scalable solution that covers all major OLAP tools, such as Information Advantage, MicroStrategy, Hyperion, and Oracle Express. . Pure.Center(TM) - integrated scheduling and operations management framework to help customers manage the deployment and maintenance process. The Company's products are meta data-driven in their architecture, which not only speeds the development process but also simplifies ongoing maintenance. Meta data is automatically captured in our meta data repository. This repository contains all the business, technical and operational information required for creating, maintaining and managing the data preparation process. The repository serves as the integration point between the Company's tools, resulting in increased developer productivity. In addition, the meta data can be exported to other leading third party tools. In addition to the software products identified above, the Company provides professional and consulting services to its software licensees. These services include product training, on-site mentoring and full project management. The Company's professional and consulting services are usually contracted for separately, at, or shortly after, the initial software license agreement is executed. The engagements can be for as short a period of time as a few days in the case of product training to as long as twelve months or more for large, complex projects. Marketing and Customers The Company is focused on the CRM, data warehouse and application conversion markets. The Company distributes its technology and professional services through direct sales and channel partners primarily in North America. Most of the Company's employees are located at its two primary locations in Minneapolis, Minnesota and Billerica, Massachusetts, with some sales people located elsewhere in the United States and Canada. Given the Company's level of total sales revenue and the sales amount resulting from each direct licensing agreement, there are several customers with whom the Company did business resulting in more than 10% of the Company's revenues. For the fiscal year ended March 28, 1999, sales to one customer accounted for 22% of total revenues, and sales to a second customer accounted for 11% of total revenues. In the fiscal year ended March 29, 1998, one customer accounted for 20% of total revenues, and a second customer accounted for 14% of total revenues. In the fiscal year ended March 30, 1997, one customer accounted for 15%, a second customer for 13%, a third customer for 11% and a fourth customer for 10% of total revenues. The customer that accounted for 20% of total revenues in fiscal 1998 is the same customer that accounted for 13% of total revenues in fiscal 1997. -3- Backlog The Company attempts to ship orders to end-user customers within 30 days. Because of this short delivery cycle, the Company does not believe backlog is a meaningful indicator of future revenues. Customer Service The Company works with customers on a direct service basis out of its locations in Minneapolis and Billerica to provide prompt and reliable support for products installed at end-user facilities. Company employees also provide software product maintenance through its technical services group. Product Development The Company continues to invest significantly in ongoing research, development and engineering to make improvements in its products. Improvements are focused on product performance, ease of use and added features that address the needs of the developers building data warehouses or migrating data to new packaged applications. Year 2000 Compliance Introduction The Company relies heavily on sophisticated information technology ("IT") and non-information technology ("Non-IT") for its business operations. Additionally, the Company's products consist of sophisticated software products that interface directly with our customers' information technology systems. The Company's Year 2000 (Y2K) compliance issues are, therefore, broad and complex. The Company established a Y2K Committee in December 1998 to coordinate and support the Company's Y2K compliance effort. The Company's Y2K compliance efforts are focused on business-critical items. Hardware, software (including our software products), systems, technologies and applications are considered "business-critical" if a failure would have a material adverse effect on the Company's business, financial condition or results of operations. The Company believes that its Y2K compliance effort is on schedule and believes that it will achieve Y2K compliance prior to January 1, 2000. Carleton Corporation Software Products The Company has, and continues to, take significant actions to ensure Y2K compliance with customers' use of the Carleton family of data integration tools. The Company has developed a comprehensive suite of Y2K tests and has performed those tests against its products. The testing of Enterprise Integrator 4.3.1, Passport 5.1 for the Mainframe, Passport 5.7.02 and Pure Dimension has been completed, and these products meet the Company's Y2K compliance requirements. For those customers with current support agreements, Enterprise Integrator 4.3.1 was shipped prior to March 28, 1999, Passport 5.7.02 was shipped by May 7, 1999 and Passport 5.1 release CAL216 was shipped by May 14, 1999. Although the Company believes its Y2K testing has been extensive and rigorous, in the event that unforeseen compliance issues arise, they will be corrected and delivered to customers as part of the support agreements between the customer and the Company. The Company will also take steps to ensure that all releases subsequent to the above releases and all new products will also be Y2K compliant. Internal Business-Critical Infrastructure and Applications Software The Company's compliance efforts for all business-critical infrastructure and applications software ("IT Systems") are 95% complete as of March 28, 1999. The Company has inventoried all of its IT Systems. All of the Company's internal hardware systems are Y2K compliant as of March 28, 1999. The software packages that the Company uses for internal processing to support its operations and to support its on-going development efforts are obtained from -4- outside vendors. These software packages are Y2K compliant and have been installed as of March 28, 1999 with the exceptions of the voice-mail software for both the Minnetonka and Billerica facilities, router software for the Company's network servers and the software used for payroll processing. The voice-mail software was installed at the end of April 1999 for the Billerica facility. The voice-mail software for our Minnetonka facility was installed in the middle of May 1999. The router software for our network servers and the payroll processing software were installed at the end of April 1999. Interfaces with Material Third Parties The Company is making concerted efforts to understand the Y2K status of third parties, including property owners of our leased office facilities, telecommunications vendors, utilities, banks, payroll processors and the trustee of the Company's 401(k) Investment and Savings Plan. The Y2K non-compliance of any of these third parties could have a material adverse effect on the Company's business, financial condition or results of operations. The Company is actively encouraging Y2K compliance on the part of third parties and is developing contingency plans in the event of their Y2K non-compliance. The Company's vendor and product compliance program includes the following tasks: assessing vendor compliance status; tracking vendor compliance progress; addressing contract and lease language; developing contingency plans, including identifying alternate suppliers and assessing the availability of redundant or backup sources; and sending questionnaires. The Company is requesting assurances from its vendors and other third party suppliers that they are addressing Y2K issues and that the products and services purchased by the Company from these vendors and suppliers will function properly in the year 2000 and beyond. If third parties fail to respond to these questionnaires, the Company sends further mail or phone correspondence. Continued failure to respond to these questionnaires could lead to replacement of these vendors or other third party suppliers. Costs to Address Y2K Compliance The total estimated cost for resolving the Company's Y2K issues is not expected to exceed $110,000, of which approximately $85,000 has been spent through March 28, 1999. This includes the cost of testing the Company's products for Y2K compliance and costs relating to internal processing systems or vendor-provided systems that may be incurred in making such systems Y2K compliant. Estimates of Y2K costs are based on numerous assumptions, and there can be no assurance that the estimates are correct or that actual costs will not be materially greater than anticipated. Contingency Planning and Risks The Company has begun developing contingency plans for Y2K non-compliance. These plans include identifying alternate suppliers, vendors, procedures, conducting staff training and developing communication plans. Any significant incremental costs associated with these plans will not become known until these plans are fully developed. The Company's standing Y2K Committee has been assigned the task of developing and coordinating the Y2K non-compliance contingency plan. The Company's goal is to complete the Y2K non-compliance contingency plan by September 30, 1999. Based on its assessments to date, the Company does not believe that it will experience any material disruption of its internal information processing, interfacing with customers or processing of orders and billing due to Y2K non- compliance. However, if certain critical third-party providers, such as those providers supplying electricity, water or telephone service, experience difficulties resulting in disruption of service to the Company, a shutdown of certain of the Company's operations at individual facilities could occur for the duration of the disruption. The Company believes that the greatest Y2K exposure exists in the following areas: failure of the electric infrastructure and failure of the telecommunications (both voice and data) infrastructure. The Company is working closely with the property owners of the Company's leased facilities to assess the possibility of providing backup systems to provide power in the event of an electric infrastructure failure and with its major telecommunications vendors to provide alternate or redundant telecommunications availability in the event of a telecommunications infrastructure failure. A temporary slowdown or cessation of operations at one or more of the Company's facilities could result in delays in meeting customers' orders, the timing of billings to and receipt of payment from customers and could result in complaints, -5- charges or claims. The Y2K non-compliance of customers could potentially delay the receipt of orders for the Company's products and also the timing of payments for products already delivered. The Company believes that its Y2K program, including related contingency planning, should significantly lessen the possibility of significant interruptions of normal operations. While costs related to the Y2K non- compliance of third parties, business interruptions, litigation and other liabilities related to Y2K issues could materially and adversely affect the Company's business, results of operations and financial condition, the Company believes its Y2K compliance effort will enable the Company to manage its Y2K transition without any material effect on its business, financial condition or results of operations. The most reasonably likely worst-case scenario of failure by the Company or its suppliers or customers to resolve Y2K issues could potentially be a temporary slowdown or cessation of operations at one or more of the Company's facilities and/or a temporary inability on the part of the Company to process orders in a timely manner and to deliver finished products to customers. Delays in meeting customers' orders could potentially affect the timing of billings to and payments received from customers and could result in complaints, charges or claims. Customers' Y2K issues could potentially also delay the receipt of orders for the Company's products and also the timing of payments to the Company for products already delivered Competition The Company's products compete with two categories of software companies: transformation tool vendors and customer data cleansing product vendors. The transformation tool competition includes Ardernt Software, Inc. and Informatica Corporation; these companies focus on building data warehouses and data marts and have few capabilities for the unique requirements of customer data management. There are a number of small vendors providing customer data cleansing products, many of which work primarily in mailing, including Harte- Hanks Communications, Inc. (Trillium division) and Group 1 Software, Inc. Another competitor to the Company's products is in-house development by companies trying to satisfy their needs without the assistance of third party tools. Many of these competitors have substantially greater capital resources, technical expertise, marketing experience, research and development staffs and facilities than the Company. As a result, there can be no assurance that the Company will be able to compete successfully with its existing or new competitors or that competitive pressures faced by the Company will not materially and adversely affect its business, results of operations or financial condition. Service and Maintenance The Company offers service and maintenance programs for all of its products, and customers generally choose to take advantage of these programs to provide coverage for software support and upgrades to new releases of software. The Company's products generally support industry standard network management standards and have extensive remote diagnostic capabilities. Intellectual Property The Company relies on a combination of copyright, trademark and trade secret laws, employee and third-party nondisclosure agreements and other standard industry methods for protecting ownership of its proprietary software. There can be no assurance, however, that, in spite of these precautions, an unauthorized third party will not copy or reverse-engineer certain portions of the Company's products or obtain and use information that the Company regards as proprietary. Employees As of June 1, 1999, the Company employed 66 persons, including 26 in research, development and engineering, 18 in sales and marketing, 13 in professional services and 9 in finance and administration. None of the Company's employees is covered by a collective bargaining agreement, and the Company believes that it maintains good relations with its employees. -6- Executive Officers of the Registrant The following sets forth certain information regarding the executive officers of the Company:
Name Age Position - ------ --- -------- Robert D. Gordon................ 50 Chairman of the Board, Chief Executive Officer, Chief Financial Officer, and President Alexander F. Collier............ 47 Corporate Vice President, Research and Development David M. Haggerty............... 47 Corporate Vice President, Professional Services Travis M. Richardson............ 36 Corporate Vice President, Marketing Eugene E. Waara, Jr............. 41 Corporate Vice President, Sales
Robert D. Gordon has been Chairman of the Board and Chief Executive Officer of the Company since April 1990, President of the Company since December 1988, and Chief Financial Officer of the Company since January 1999. Mr. Gordon was first employed by the Company as Senior Vice President in July 1987 and subsequently served as Chief Financial Officer from August 1987 to May 1988, Secretary from January 1988 to September 1988, and Group Vice President, Sales and Marketing from April 1988 to December 1988. From April 1984 to July 1987, Mr. Gordon was Executive Vice President of First Bank System, Inc. Mr. Gordon has been a director of the Company since August 1987. Alexander F. Collier has served as the Company's Corporate Vice President, Research and Development, since November 1997 and came to the Company in connection with the acquisition of Carleton Corporation. Mr. Collier served as Vice President of Product Development of Carleton Corporation from June 1997 to October 1997. From November 1996 to June 1997, Mr. Collier was Vice President of Development for Asyst Automation, a manufacturer of semi-conductor automation equipment. Prior to Asyst Automation, Mr. Collier served as President of Position Sensitive Robots, a provider of software products for real-time industrial control applications founded by Mr. Collier in 1991. David M. Haggerty has served as the Company's Corporate Vice President, Professional Services, since February 1998. Prior to his current position, Mr. Haggerty held the position of Director - Software Development and Director - Engineering. Mr. Haggerty has been employed by the Company since November 1992. Travis M. Richardson has held the position of Corporate Vice President, Marketing, since February 1998. Prior to his current position, Mr. Richardson served as Chief Technical Officer and Director of Planning. Mr. Richardson has been employed by the Company since October 1988. Eugene E.Waara, Jr. has been Corporate Vice President, Sales, since February 1998. Prior to his current position, Mr. Waara served as Sales Director. Mr. Waara has been employed by the Company since October 1982. Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995 This Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward- looking statements involve risks and uncertainties that may cause the Company's actual results to differ materially from the results discussed in the forward- looking statements. Factors that might cause such differences include, but are not limited to, the following: decreased demand for the Company's products; heightened competition; market acceptance risk; risk of lengthening sales cycles; risk of technological obsolescence of the Company's products; inability to manage the Company's cost structure; risks associated with sales of products outside the United States; increased expenses; failure to obtain new customers or retain existing customers; inability to carry out marketing and sales plans; loss or retirement of key executives; risks associated with the Company's dependence on proprietary technology, including those related to adequacy of copyright, trademark and trade secret protection; risks associated with single sources of supply for certain components used in the Company's products; and changes in interest rates. These forward-looking statements are qualified in their entirety by the cautions and risk factors set forth under "Cautionary Statement" filed as Exhibit 99.1 to this Annual Report on Form 10-K. -7- Item 2. Properties In July 1990, the Company moved its principal office and manufacturing facility to 60,000 square feet of leased space in a building located in Eden Prairie, Minnesota. In February 1996, the Company signed a Second Amendment to the Lease for the Eden Prairie office in which the Company assumed the remaining space (expanding from 60,000 square feet to 76,462 square feet) and extended the terms of the original lease through July 2002. In July 1997, the Company entered into a sublease agreement with a tenant in Eden Prairie for 14,715 square feet. The sublease runs through August 2000. In April 1998, the Company entered into an agreement with Best Buy Co., Inc. in which Best Buy, Inc. took over the entire lease obligation on the Eden Prairie facility. In September 1998, the Company relocated to its current site in Minnetonka, Minnesota. The lease runs through August 2003 and requires future fixed rent payments of approximately $1.0 million subsequent to March 1999 through the end of the lease. The Company is also responsible for its share of operating costs. The Company also leases 11,881 square feet of space in a building in Billerica, Massachusetts. The lease runs through September 2001 and requires future fixed rent payments of approximately $405,000 subsequent to March 1999 through the end of the lease. The Company is also responsible for its share of operating costs. The Company continues to lease 11,729 square feet of space at One Penn Plaza in New York. The lease term expires in October 2001. This space has been divided and sublet to two separate companies. The resulting annual lease payments are approximately $20,000, net of sublease rental receipts, and the resulting shortfall over the remaining term of the lease has been accrued for. The Company was the lessee on space in a building in the United Kingdom. Computer Network International Limited assumed the obligations of the Company under the lease (including payment of all future rents) in conjunction with the sale of the Company's Internet Solutions Division to Computer Network Technology Corporation. Item 3. Legal Proceedings The Company was a defendant in a complaint filed on May 29, 1998 in the U.S. district Court for the District of Massachusetts (case no. 98-11026WGY) by Case Associates, NV and Carleton Europe, NV. The complaint sought injunctive relief and monetary damages arising out of an alleged breach of contract and infringement by Carleton Corporation and the Company (as successor to Carleton Corporation) of a copyright in certain "Passport" computer software held by the plaintiffs. Such disagreement was resolved in a settlement agreement dated March 19, 1999 whereby the Company agreed to pay $500,000 ($200,000 in the form of a non-interest bearing note due on March 16, 2001) in exchange for, among other things, unlimited use of the Carleton name and release from any future claims. Item 4. Submissions of Matters to a Vote of Security Holders None. Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters The information contained under the heading "Dividend Policy and Price Range of Common Stock" on page 23 of the Annual Report to Shareholders is incorporated herein by reference. This information is also included in Exhibit 13 to this Form 10-K, as filed with the Securities and Exchange Commission (the "SEC"). Item 6. Selected Financial Data The information contained under the heading "Selected Historical Financial Data" on page 22 of the Annual Report to Shareholders is incorporated herein by reference. This information is also included in Exhibit 13 to this Form 10-K, as filed with the SEC. -8- Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The information contained under the heading "Management's Discussion and Analysis" on pages 2 through 8 of the Annual Report to Shareholders is incorporated herein by reference. This information is also included in Exhibit 13 to this Form 10-K, as filed with the SEC. Item 7A. Quantitative and Qualitative Disclosures About Market Risk Not applicable. Item 8. Financial Statements and Supplementary Data The independent auditors' report, consolidated financial statements and notes to consolidated financial statements on pages 9 through 21 of the Annual Report to Shareholders are incorporated herein by reference. This information is also included in Exhibit 13 to this Form 10-K, as filed with the SEC. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. Part III Item 10. Directors and Executive Officers of the Registrant The information contained under the headings "Election of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's Proxy Statement for its 1999 Annual Meeting of Shareholders to be filed with the SEC on or before July 26, 1999 (the "Proxy Statement") are incorporated herein by reference. The information contained under the heading "Executive Officers of the Registrant" in Part I hereof is also incorporated herein by reference. Item 11. Executive Compensation The information contained under the heading "Executive Compensation" in the Proxy Statement is incorporated herein by reference, except that the information set forth under the captions "Report of Compensation Committee on Annual Compensation" and the "Comparative Stock Performance" graph are not incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management The information contained under the heading "Security Ownership of Certain Beneficial Owners and Management" in the Proxy Statement is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions None. -9- Part IV Item 14. Exhibits, Financial Statements, Financial Statement Schedules, and Reports on Form 8-K (a) Exhibits, Financial Statements, Financial Statement Schedules
1. Financial Statements Page Reference in -------------------- Exhibit 13 to this Form 10-K Annual Report ------------------ Consolidated Statements of Operations for the Fiscal Years Ended March 28, 1999, March 29, 1998 and March 30, 1997....................................... 9 Consolidated Balance Sheets as of March 28, 1999 and March 29, 1998............................. 10 Consolidated Statements of Cash Flows for the Fiscal Years Ended March 28, 1999, March 29, 1998 and March 30, 1997....................................... 11 Consolidated Statement of Shareholders' Equity for the Fiscal Years Ended March 28, 1999, March 29, 1998 and March 30, 1997................................. 12 Notes to Consolidated Financial Statements...................................................... 13 - 20 Report of Independent Auditors.................................................................. 21 Company Report on Financial Statements.......................................................... 21
The financial statements listed above are included in Exhibit 13 and are hereby incorporated by reference.
2. Financial Statement Schedules Page Number in ----------------------------- This Form 10-K Annual Report -------------- Independent Auditor's Report on Supplemental Financial Schedule................................................................. Exhibit 23 Schedule II Valuation and Qualifying Accounts and Reserve for the Years Ended March 28, 1999, March 29, 1998 and March 30, 1997............................. 14
All other schedules are omitted since the required information is not represented or is not present in amounts sufficient to require submission of the schedule, or because the information required is included in the financial statements and notes thereto. 3. Exhibits -------- Exhibit Number Description ------ ----------- 2.1 Agreement and Plan of Merger between the Company and the former Carleton Corporation, dated as of October 24, 1997, including form of Note (1) 2.2 Asset Purchase Agreement between CNT Acquisition I Corporation, Computer Network Corporation and the Company and certain of its subsidiaries, dated as of October 24, 1997 (1) -10- 3.1 Restated Articles of Incorporation, as amended (2) 3.2 Restated Bylaws, as amended (2) 4 Amended and Restated Rights Agreement, dated September 4, 1996, between the Company and Norwest Bank Minnesota, N.A. , as Rights Agent (2) 10.1 *Amended 1990 Long Term Incentive Plan (4) 10.2(a) Office Warehouse Lease, dated May 10, 1990, between the Company and Real Estate Income Partners III, a Limited Partnership (5) 10.2(b) Second Amendment to Lease, dated February 18, 1996, between the Company and Real Estate Income Partners III, Limited Partnership (6) 10.2(c) Assignment and Assumption of Lease, dated April 16, 1998, between the Company and Best Buy Co., Inc. (8) 10.2(d) Industrial Lease dated June 23, 1998 between the Company and Bren Associates LLC (9) 10.3 Lease, dated July 25, 1996, between Technology Park VIII L.P. and Carleton Corporation (for the Billerica facility) (8) 10.4(a) * 1999 Management Bonus Plan description (8) 10.5(a) * Stock Acquisition Loan Assistance Program (3) 10.5(b) * 1993 Stock Acquisition Loan Assistance Program (4) 10.6 Agreement of Lease, dated November 1, 1995, between the Company and Two Penn Plaza Associates (6) 10.7* 1995 Employee Stock Purchase Plan (6) 10.8* Form of Deferred Compensation Agreement (6) 10.9* Separation Agreement and Mutual Release, each dated October 10, 1997, between the Company and Julie Cummins Brady (7) 10.10* Letter of Mutual Resignation Agreement dated January 12, 1998, between the Company and Paul Fluckiger (7) 13 Annual Report to Shareholders for the fiscal year ended March 28, 1999 21 Subsidiaries of the Registrant 23 Consent of Ernst & Young LLP 24 Power of Attorney 27 Financial Data Schedule 99.1 Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995
* Denotes management contracts and compensatory plans, contracts, and arrangements. -11- (1) Incorporated by reference to the Company's Report on Form 8-K filed November 10, 1997 (SEC file number 01-12378). (2) Incorporated by reference to the Company's Report on Form 8-K filed September 5, 1996 (SEC file number 0-12378). (3) Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended March 28, 1993 (SEC file number 0-12378). (4) Incorporated by reference to the Company's Registration Statement on Form S- 8 filed March 31, 1994 (SEC file number 33-77176). (5) Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended April 1, 1990 (SEC file number 0-12378). (6) Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1996 (SEC file number 0-12378). (7) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarterly period ended December 28, 1997 (SEC file number 0-12378). (8) Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended March 29, 1998 (SEC file number 0-12378). (9) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 28, 1998 (SEC file number 0-12378). (b) Reports on Form 8-K. None. -12- Signature Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: July 13, 1999 CARLETON CORPORATION By: /s/ Robert D. Gordon -------------------------------------- Robert D. Gordon Chairman of the Board, Chief Executive Officer and President Robert D. Gordon* Chairman of the Board, ) Chief Executive Officer, ) Chief Financial Officer, ) Chief Accounting Officer, ) President and Director ) (Principal Executive Officer) ) ) ) *By: /s/ Robert D. Gordon ---------------------- Robert D. Gordon Pro Se and Attorney-in-Fact ) Nicholas J. Covatta, Jr.* Director ) ) Michael Dexter-Smith* Director ) ) Date: July 13, 1999 ) Robert W. Fischer* Director ) ) George E. Hubman* Director ) ) Arch J. McGill* Director ) )
__________________________ *Executed on behalf of the indicated persons by Robert D. Gordon pursuant to the Power of Attorney included as Exhibit 24 to this annual report. -13- Carleton Corporation Schedule II -- Valuation and Qualifying Accounts and Reserve for the Years Ended March 28, 1999, March 29, 1998, and March 30, 1997 (Dollars in Thousands) Allowance for Doubtful Accounts: (A)
Column A Column B Column C Column D Column E Balance at Additions Charged to Balance at End of Description Beginning of Period Costs and Expenses Deductions (B) Period - --------------------- ------------------- ------------------- -------------- ----------------- Year Ended: March 28, 1999 $ 185 $ - $ 135 $ 50 March 29, 1998 $ 3,606 $ 147 (C) $ 3,568 (D) $ 185 March 30, 1997 $ 1,839 $ 2,681 $ 914 $ 3,606 (E)
(A) The allowance has been netted against accounts receivable as of the respective balance sheet dates. (B) Write-offs, net of recoveries. (C) Includes $56 of allowance acquired in the Carleton Corporation acquisition. (D) Includes $2,253 of allowance sold with the Internet Solutions Division divestiture. (E) Includes $250 of allowance allocated to installment receivables. -14- Carleton Corporation Index of Exhibits Annual Report on Form 10-K405 For the Year Ended March 29, 1998
Exhibit Page Number Description Number 13 Annual Report to Shareholders for the fiscal year ended Electronically Filed March 28, 1999 21 Subsidiaries of the Registrant Electronically Filed 23 Consent of Ernst & Young LLP Electronically Filed 24 Power of Attorney Electronically Filed 27 Financial Data Schedule Electronically Filed 99.1 Cautionary Statement for Purposes of the "Safe Harbor" Electronically Filed Provisions of the Private Securities Litigation Reform Act of 1995
EX-13 2 ANNUAL REPORT Exhibit 13 ---------- Carleton Pure data Pure results 1999 ANNUAL REPORT Year Ended March 28, 1999 Carleton is a leading provider of customer data management solutions for customer-focused front office and analytical applications. BOARD OF DIRECTORS Robert D. Gordon Chairman of the Board, Chief Executive Officer, Chief Financial Officer, President Carleton Corporation Nicholas J. Covatta, Jr. Chairman of the Board Atlantis Group, Inc. Michael Dexter-Smith Chief Executive Officer VenturCom, Inc. Robert W. Fischer President Robert W. Fischer & Co., Inc. George E. Hubman Independent Consultant Arch J. McGill President Chardonnay, Inc. Group CORPORATE OFFICERS Robert D. Gordon Chairman of the Board, Chief Executive Officer, Chief Financial Officer, President Alexander F. Collier Corporate Vice President, Research & Development David M. Haggerty Corporate Vice President, Professional Services Travis M. Richardson Corporate Vice President, Marketing Eugene E. Waara, Jr. Corporate Vice President, Sales MESSAGE TO SHAREHOLDERS Fiscal year 1999 was an exciting year for the new Carleton Corporation. Key accomplishments included new company positioning around customer relationship management (CRM), the introduction of Carleton's new Pure-View(TM) customer data management products, and growing revenue momentum that reflects early market success for our new products and positioning. The challenge looking forward to fiscal year 2000 is to accelerate revenue momentum and secure new capital to expand sales and marketing. Positioning and Products Today Carleton is positioned as a leading provider of customer data management solutions. Carleton's Pure-View is the only integrated solution that combines data from diverse sources to create complete and accurate customer profiles to enable CRM applications. This positioning fulfills our vision, which was articulated in October 1997. At that time, the new Carleton was created through the merger of Apertus Technologies Incorporated and Carleton Corporation to focus on developing and marketing a new generation of customer data management solutions by leveraging core technologies of the combined companies. In November 1998, Carleton reinforced this positioning by introducing Pure-View to aggressively target CRM applications, one of the fastest growing segments of the corporate IT solutions market. Market Opportunity The market opportunity for Carleton is expected to be significant. IDC, a leading market research firm, estimates the combined market for analytical applications and tools to build, manage and access the underlying data warehouses and data marts will increase from $4.9 billion in 1998 to $11.8 billion by the year 2002. Carleton's Pure-View customer data management solution is well positioned to participate in this growth by addressing the growing demand for accurate customer data. Carleton sees customer data management as a critical success factor for fueling the new generation of analytical CRM applications that are designed for targeting, penetrating and retaining customers. Pure-View changes the competitive paradigm with its superior capabilities and strong competitive differentiation. Unlike expensive multi-vendor alternatives, Pure-View is the only product that combines the complete data extraction, data transformation, and deep customer data cleansing capabilities required for CRM applications in one cost-effective solution. Since the release of Pure-View in November 1998, Carleton has achieved market validation and success, winning major new accounts like ABN AMRO, H&R Block and RCN Corporation. Pure-View has also received strong support from leading marketing analysts like Gartner, META Group and Aberdeen, and growing interest from major systems integrators. Fiscal 2000 Challenges To realize the full potential of Pure-View, Carleton must significantly increase its investment in new sales and marketing programs. To meet this objective, Carleton has retained Dougherty Summit Securities, an investment banking firm that specializes in financing emerging growth companies, to advise Carleton on strategic alternatives for financing Pure-View growth. Carleton anticipates presenting a formal proposal to shareholders for approval at its 1999 annual meeting later this summer. The creation of the new Carleton is an exciting venture and I remain confident the new Carleton will be a success. /s/ Robert D. Gordon Robert D. Gordon Chairman, CEO, CFO, and President MANAGEMENT DISCUSSION AND ANALYSIS Overview Carleton Corporation delivers data integration software and services that enable large organizations to rapidly deploy business-critical applications, such as customer relationship management systems (CRM), data warehouses, data marts and new packaged applications. Industry analysts estimate that the data preparation process--including data extraction, transformation, cleansing, integration, dimensioning & aggregating--represents as much as 60-80% of the deployment costs of a data warehouse. Our solutions provide unparalleled capability in automating these critical data preparation processes, resulting in faster application development, improved data quality, lower implementation costs, and reduced overall project risk. Our corporate tag line "Pure data Pure results" captures our expertise and focus on data integration along with our commitment to our customer's success. We offer an integrated product suite which provides a complete solution for creating and maintaining customer relationship management systems, data warehouses, data marts or packaged application conversions. Our products are meta data-driven in their architecture, which not only speeds the development process but also simplifies ongoing maintenance. Meta data is automatically captured in our meta data repository. This repository contains all the business, technical and operational information required for creating, maintaining and managing the data preparation process. The repository serves as the integration point between our tools, resulting in increased developer productivity. In addition, the meta data can be exported to other leading third party tools. Our implementation services are designed to help our customers be successful in their deployment of their business-critical applications. Our customers like the fact that we offer a wide range of services, including product training, on-site mentoring for fast project start-ups and full project management capabilities. At Carleton, we take a deliverables-driven approach to managing projects, with clearly defined goals that meet the deadline and budget parameters of each project. RESULTS OF CONTINUING OPERATIONS Restatement of Financial Statements On October 31, 1997, we acquired the former Carleton Corporation in a transaction accounted for using the purchase method. In accordance with Accounting Principles Board Opinion No. 16, "Accounting for Business Combinations," we allocated costs of the acquisition to the assets acquired and liabilities assumed based on their estimated fair values using valuation methods believed to be appropriate at the time. We expensed in-process research and development (IPR&D) ($9.5 million) related to the acquisition in accordance with FASB Interpretation No. 4, "Applicability of FASB Statement No. 2 to Business Combinations Accounted for by the Purchase Method." In response to the Securities and Exchange Commission (SEC) letter to the AICPA dated September 9, 1998 regarding its views on IPR&D, we have re-evaluated our original IPR&D charge taken in connection with the acquisition. As a result of the re-evaluation, we have revised the purchase price allocation and restated our financial statements for the fiscal year ended March 29, 1998. We have decreased the amount previously expensed as IPR&D and increased the amount capitalized as developed technology and goodwill by $7.9 million for the fiscal year ended March 29, 1998. Additionally, amortization of goodwill related to the restatement has been increased by $1.1 million for the fiscal year ended March 29, 1998. The effect of these adjustments on the reported consolidated financial statements as of and for the year ended March 29, 1998 is disclosed in Note 4 to the Consolidated Financial Statements - Acquisition of the Former Carleton Corporation. Valuation Analysis - Acquisition of the former Carleton Corporation Valuation Methodology Standard valuation procedures and techniques were utilized in determining the fair value of each intangible asset. The valuation was performed by an outside organization in conformity with the requirements of the Principals of Appraisal Practice Code of Ethics of the American Society of Appraisers. Intangible assets were identified through discussions regarding the Company's intentions for 2 future use of the acquired assets, interviews with the Company's management, and analysis of data provided by the Company concerning its products, technologies, markets, historical financial performance, estimates of future performance, and the assumptions underlying those estimates. The economic and competitive environment in which the Company and the former Carleton Corporation operate was also considered in the valuation analysis. Specifically, purchased research and development was identified and valued through extensive discussions with the Company's management and the Company's analysis of the data provided concerning developmental products, their respective stage of development, the time and resources needed to complete them, their expected income-generating ability, their target markets and associated risks. The Income Approach, which includes an analysis of the markets, cash flows, and risks associated with achieving such cash flows, was the primary technique utilized in valuing each purchased research and development project. A portion of the purchase price was allocated to the developmental projects based on the appraised fair values of such projects. Valuation Analysis The value of the acquired in-process technology was computed using a discounted cash flow analysis on the anticipated income stream of the related product sales. The discounted cash flow analysis was based on management's forecast of future revenues, cost of revenues, and operating expenses related to the products and technologies purchased from the former Carleton Corporation. Management's analysis also considered anticipated product development and product introduction schedules for future products, product sales cycles, and the estimated life of a product's underlying technology. Revenue Revenue estimates for the acquired technologies were developed by the Company's management and represent expectations of the former Carleton Corporation on a stand-alone basis, exclusive of any synergies that may be derived from the combination with the Company. Operating Expenses Operating expenses used in the valuation analysis of the former Carleton Corporation included (i) cost of goods sold, (ii) general and administrative expense, (iii) selling and marketing expense, and (iv) research and development expense. Selected operating expense assumptions were based on an evaluation of the overall business model, including both historical and expected direct expense levels (as appropriate), and an assessment of general industry metrics. Cost of Goods Sold. Cost of goods sold, expressed as a percentage of revenue, for the in-process technologies was estimated to be 11% throughout the estimation period. Cost of goods sold estimates, expressed as a percentage of revenues, were based on historical and expected cost of goods sold as a percentage of revenues, and an assessment of general industry gross margins. General and administrative ("G&A") expense. G&A expense, expressed as a percentage of revenue, for the in-process technologies was estimated to decline from 25.1% for the 3.9 months ended February 28, 1998 (the former Carleton Corporation's fiscal year end) to 8.4% for the fiscal year ended February 28, 1999. G&A expense was estimated to stabilize at 5.0% of revenue for the remainder of the estimation period. These estimates were based on historical company-wide G&A levels. Selling and marketing expense. Selling and marketing expense, expressed as a percentage of revenue, for in-process technologies was estimated to decline from 77.6% to 14.5% during the estimation period based upon the former Carleton Corporation's historical experience with similar products. Maintenance research and development ("R&D") expense. Maintenance R&D activities and associated expenses consist of the costs associated with activities undertaken after a product is available for general release to correct errors or keep products updated with current information. These activities include routine changes and additions. The maintenance R&D expense, expressed as a percentage of revenue, for the in-process technologies was estimated to be approximately 1.0% throughout the estimation period based on the former Carleton Corporation's historical experience with similar products. Operating margin. Accordingly, operating margins for the in-process technologies were estimated to increase from -14.7% for the 3.9 months ended February 28, 1998 to 50.9% during 1999 to 68.5% during 2004. The anticipated early release in fiscal 1999 of Passport 5.6-5.7 and later release in fiscal 1999 of Pure Extract were estimated to generate significant licensing revenues and propel the improved operating margin in fiscal 1999. 3 Effective Income Tax Rate The effective tax rate utilized in the analysis of the in-process technologies reflected the former Carleton Corporation's combined federal and state statutory income tax rates, exclusive of non-recurring charges at the time of the acquisition and estimated for future years. The effective tax rate, expressed as a percentage of operating income, for the in-process technologies was estimated to be approximately 34.0% throughout the estimation period. Discount Rate The discount rate selected for the in-process technology was 30%. In the selection of the appropriate discount rate, primary consideration was given to the former Carleton Corporation's Weighted Average Cost of Capital ("WACC"), as well as venture capital rates of return. The discount rate utilized for the in-process technology was determined to be higher than the former Carleton Corporation's WACC due to the fact that the technology had not yet reached technological feasibility as of the date of valuation. In utilizing a discount rate greater than the former Carleton Corporation's WACC, the Company's management has reflected the risk premium associated with achieving the forecasted cash flows associated with these projects. Comparison to Actual Results The assumptions used in the projections of revenues from IPR&D projects and the estimated costs and completion dates for those projects were reasonable based on factors known at the acquisition date. Our actual results for the fiscal year ended March 28, 1999 reflect several unexpected difficulties that we encountered during the year: 1) The quality of the acquired Passport 5.6-5.7 technology was dramatically different than presented at acquisition. There were significant customer issues that arose after acquisition. These quality issues led to the loss of Software AG as a partner and, consequently, no revenue was generated by them in the fiscal year ended March 28, 1999. The quality issues also resulted in no revenue being generated by NCR, another partner, in the Pacific Rim for the year ended March 28, 1999. As a result, the Company had to direct development resources towards dealing with the quality issues, which delayed the completion of previously anticipated development projects. 2) The integration of the acquired Passport 5.6-5.7 technology into the Company's existing Enterprise Integrator technology was more challenging than anticipated and required the unplanned addition of third party products to complete the Company's planned release of an integrated product suite. The complexity of integrating the differing technologies required significantly more development effort than originally anticipated and delayed the release of the anticipated integrated products. The release of the integrated products was further delayed by the realization that additional functionality would have to be included in the release of the integrated suite of products in order to achieve the Company's revenue goals. The Company completed a Software License Reseller Agreement with Firstlogic, Inc. on August 1, 1998 that allows the Company to market Firstlogic's Firstlogic ACE Library Functionality(TM), Firstlogic TrueName Library Functionality(TM) and Firstlogic ZIP+4 Database(TM) as additional tools in the Company's integrated suite of products. On September 29, 1998 the Company completed an agreement with RelMat Corporation (now part of Cognos Corporation) to resell their DecisionStream(TM) software as part of the Company's integrated suite of products. Anticipated revenues from the integrated products were not fully realized in the fiscal year ended March 28, 1999 due to the delays associated with the difficulties in integrating the technologies and the need to add additional functionality to the product suite through the inclusion of third party products. 3) The legal issues with respect to the ownership of some of the Passport code required the Company to divert development resources towards removing the disputed code from the product and replacing it with new, internally-developed code. This diversion of resources delayed the completion of development on Passport 5.6-5.7. The Company believes that the delay in the release of the integrated suite of products and the unanticipated quality problems associated with the acquired Passport technology resulted in the large shortfall between estimated revenues used for the valuation of IPR&D and actual revenues. The Company believes that its estimates for costs and expenses used in the valuation of IPR&D were reasonable. 4 Fiscal Year 1999 Compared to Fiscal Year 1998 Revenues and earnings in the software industry are subject to fluctuation. The Company derives revenues from: o licensing of its software products and third party software products that the Company sells under reseller agreements, o professional consulting and implementation services and o other services, consisting primarily of maintenance fees paid by the Company's installed customer base for ongoing technical support services. Revenues were $5,559,000 in fiscal 1999 compared to $3,048,000 in fiscal 1998, an increase of $2,511,000 or 82%. The increase in revenues was due to fiscal 1999 including a full twelve months of operations of the combined operations of the Company and the former Carleton Corporation compared to only five months of combined operations in fiscal 1998 and sales growth in the third and fourth quarters of fiscal 1999. License revenues increased by $833,000 or 90% to $1,755,000 in fiscal 1999. Professional services revenues increased by $1,052,000 or 72% to $2,518,000 in fiscal 1999. Other services revenues increased by $626,000 or 95% to $1,286,000 in fiscal 1999. Costs of revenues increased by 49% in fiscal 1999, resulting in an improved gross profit margin of 41% compared to 28% in fiscal 1998. Gross profit margins improved for each source of revenue in fiscal 1999 compared to fiscal 1998 although the costs of professional services still exceeded the revenues generated. The absence of capitalized software amortization, increased utilization efficiency of the professional services consultants and the increase in maintenance revenues (a result of both twelve months of combined operations and the Company's increased installed customer base) were the most significant factors contributing to the improved gross profit margins in fiscal 1999. The proportion of revenue types (licensing, professional services and other services) to total revenues remained relatively constant in fiscal 1999 compared to fiscal 1998. The Company believes that licensing revenues must grow significantly both in total and as a proportion of total revenues in order to achieve profitability. Research, development and engineering expenses increased by $850,000 or 34% in fiscal 1999 compared to fiscal 1998. Additionally, $231,000 of costs related to PureoExtract were capitalized in fiscal 1999. Research, development and engineering expenses consist primarily of personnel costs, facility costs and equipment and software costs. The increase was due to fiscal 1998 expenses reflecting only five months of expenses from the combined operations of the Company and the former Carleton Corporation and to the Company's ongoing commitment to invest in improvements to our products' performance. The Company will continue to invest in product improvement with its focus on performance, ease of use and added features in order to address the requirements of our customers. Selling, general and administrative expenses increased by $539,000 or 11% in fiscal 1999 compared to fiscal 1998. Selling, general and administrative expenses consist primarily of personnel costs, facility costs and professional fees. Fiscal 1999 results reflect a full twelve months of expenses of the combined operations of the Company and the former Carleton Corporation compared to only five months of expenses from the combined operations in the fiscal 1998 results. Personnel savings in the general and administrative area were realized through the elimination of duplicative executive and office positions. The savings realized in general and administrative personnel reductions were partially offset by the expansion of the sales and business development force, which was necessary to support the increased level of sales. Additionally, marketing expenses increased in fiscal 1999 as the Company invested in product placement, market positioning and brand identification. Fiscal 1999 expenses include approximately $250,000 of non recurring legal expenses associated with the settlement of the legal dispute between the Company and Case Associates and Carleton Europe in excess of the amount that was available as an offset against the notes payable to the former Carleton shareholders (see Notes 4 and 6). Other charges decreased by $943,000 or 26% in fiscal 1999 compared to fiscal 1998. Other charges consist primarily of amortization of goodwill recorded in connection with the acquisition of the former Carleton Corporation. The decrease in fiscal 1999 is due to the absence of the $1,600,000 charge for acquired in-process research and development taken in connection with the acquisition of the former Carleton Corporation recorded in fiscal 1998 and the write off of $858,000 of capitalized software taken in fiscal 1998. Fiscal 1999 results reflect a full year of amortization of goodwill recorded in connection with the acquisition of the former Carleton Corporation compared to five months of amortization in fiscal 1998 (see Note 4). Net interest income decreased by $171,000 in fiscal 1999 due to the decrease in funds available to invest throughout the year because of the Company's need to fund its operating loss. 5 Fiscal Year 1998 Compared to Fiscal Year 1997 In fiscal 1998, the Company completed a major restructuring to focus itself exclusively on the dynamic data integration market. The Company sold its Internet Solutions Division and acquired the former Carleton Corporation. Both of these transactions were completed in October 1997. The sale of the Internet Solutions Division has been reflected as a discontinued operation. Fiscal 1998 revenues were $3,048,000 compared to $2,794,000 in fiscal 1997, an increase of $254,000 or 9%. The increase in revenues was due to the acquisition of the former Carleton Corporation in October 1997 and its operations being included with the Company beginning in November 1997. Revenues for the Company, excluding the incremental revenues associated with the acquisition of the former Carleton Corporation, decreased by $1,080,000 or 39% compared to fiscal 1997. Fiscal 1998 license revenues decreased $870,000 or 49% to $922,000 compared to fiscal 1997. The decrease in licensing revenues was due to fewer installations in fiscal 1998 compared to the prior year. Professional services revenues increased by $669,000 or 84% to $1,466,000 in fiscal 1998 compared to fiscal 1997. Incremental revenues provided by the acquisition of the former Carleton Corporation accounted for approximately $187,000 of the increase. The remainder of the increase was derived both from continuing engagements at existing customers and new engagements at fiscal 1998 installations. Other services revenues increased by $455,000 or 222% to $660,000 in fiscal 1998. Incremental revenues provided by the acquisition of the former Carleton Corporation accounted for $412,000 of the increase. Costs of revenues increased by $982,000 or 80% in fiscal 1998, resulting in a decrease in the gross profit margin percentage to 28% compared to 56% in fiscal 1997. The decrease in gross profit margin percentage was attributable to the decrease in higher margin licensing revenues and the increase in lower margin professional services revenues. In addition, the amortization of capitalized software against lower fiscal 1998 licensing revenues reduced the gross profit margin percentage of licensing revenues. Research, development and engineering expenses increased significantly from $766,000 in fiscal 1997 to $2,519,000 in fiscal 1998. The increase was due in part to the acquisition of the former Carleton Corporation, an increased level of investment and no capitalization of development costs in fiscal 1998. The Company's focus on investment in research, development and engineering was on product performance and stability, ease of use and increased functionality. The Company did not capitalize any development costs in fiscal 1998 because the ongoing development projects had not achieved technological feasibility. Selling, general and administrative expenses increased by $555,000 or 12% to $5,100,000 in fiscal 1998 compared to fiscal 1997. The increase was due primarily to the acquisition of the former Carleton Corporation and the expenses associated with maintaining operations at both locations. Other charges increased by $3,198,000 to $3,580,000 in fiscal 1998 compared to fiscal 1997. Other charges in fiscal 1998 include the write-off of $1,600,000 of in-process research and development taken in connection with the acquisition of the former Carleton Corporation, $1,101,000 of amortization of goodwill recognized in connection with the acquisition of the former Carleton Corporation and the write off of $858,000 of capitalized software. Net interest income increased by $206,000 in fiscal 1998 due to the increase in funds available to invest throughout the year. Impact of Inflation The Company has not experienced any significant impact from inflation. Liquidity and Capital Resources The Company had cash and cash equivalents of approximately $3,168,000 and $11,111,000 at March 28, 1999 and March 29, 1998 respectively. The Company does not anticipate any significant capital asset investment in the short term. The Company currently does not have any outside credit arrangement other than the $1,000,000 note that is secured by investments. The Company estimates that its current cash balances will not be sufficient to fund operations of the Company through the end of fiscal 2000. Accordingly, the report of the independent auditors on the Company's fiscal 1999 financial statements contains an explanatory paragraph regarding the Company's ability to continue as a going concern. There can be no assurance that the Company will be able to obtain additional financing on satisfactory terms, or at all. If the Company is unable to obtain additional financing, it will be forced to cease operations and it may be forced to seek protection under bankruptcy laws. 6 Year 2000 Introduction The Company relies heavily on sophisticated information technology ("IT") and non-information technology ("Non-IT") for its business operations. Additionally, the Company's products consist of sophisticated software products that interface directly with our customers' information technology systems. The Company's Year 2000 (Y2K) compliance issues are, therefore, broad and complex. The Company established a Y2K Committee in December 1998 to coordinate and support the Company's Y2K compliance effort. The Company's Y2K compliance efforts are focused on business-critical items. Hardware, software (including our software products), systems, technologies and applications are considered "business-critical" if a failure would have a material adverse effect on the Company's business, financial condition or results of operations. The Company believes that its Y2K compliance effort is on schedule and believes that it will achieve Y2K compliance prior to January 1, 2000. Carleton Corporation Software Products The Company has, and continues to, take significant actions to ensure Y2K compliance with customers' use of the Carleton family of data integration tools. The Company has developed a comprehensive suite of Y2K tests and has performed those tests against its products. The testing of Enterprise Integrator 4.3.1, Passport 5.1 for the Mainframe, Passport 5.7.02 and Pure Dimension has been completed, and these products meet the Company's Y2K compliance requirements. For those customers with current support agreements, Enterprise Integrator 4.3.1 was shipped prior to March 28, 1999, Passport 5.7.02 was shipped by May 7, 1999 and Passport 5.1 release CAL216 was shipped by May 14, 1999. Although the Company believes its Y2K testing has been extensive and rigorous, in the event that unforeseen compliance issues arise, they will be corrected and delivered to customers as part of the support agreements between the customer and the Company. The Company will also take steps to ensure that all releases subsequent to the above releases and all new products will also be Y2K compliant. Internal business-critical infrastructure and applications software The Company's compliance efforts for all business-critical infrastructure and applications software ("IT Systems") are 95% complete as of March 28, 1999. The Company has inventoried all of its IT Systems. All of the Company's internal hardware systems are Y2K compliant as of March 28, 1999. The software packages that the Company uses for internal processing to support its operations and to support its on-going development efforts are obtained from outside vendors. These software packages are Y2K compliant and have been installed as of March 28, 1999 with the exceptions of the voice-mail software for both the Minnetonka and Billerica facilities, router software for the Company's network servers and the software used for payroll processing. The voice-mail software was installed at the end of April 1999 for the Billerica facility. The voice-mail software for our Minnetonka facility was installed in the middle of May 1999. The router software for our network servers and the payroll processing software were installed at the end of April 1999. Interfaces with Material Third Parties The Company is making concerted efforts to understand the Y2K status of third parties, including property owners of our leased office facilities, telecommunications vendors, utilities, banks, payroll processors and the trustee of the Company's 401(k) Investment and Savings Plan. The Y2K non-compliance of any of these third parties could have a material adverse effect on the Company's business, financial condition or results of operations. The Company is actively encouraging Y2K compliance on the part of third parties and is developing contingency plans in the event of their Y2K non-compliance. The Company's vendor and product compliance program includes the following tasks: assessing vendor compliance status; tracking vendor compliance progress; addressing contract and lease language; developing contingency plans, including identifying alternate suppliers and assessing the availability of redundant or backup sources; and sending questionnaires. The Company is requesting assurances from its vendors and other third party suppliers that they are addressing Y2K issues and that the products and services purchased by the Company from these vendors and suppliers will function properly in the year 2000 and beyond. If third parties fail to respond to these questionnaires, the Company sends further mail or phone correspondence. Continued failure to respond to these questionnaires could lead to replacement of these vendors or other third party suppliers. 7 Costs to Address Y2K Compliance The total estimated cost for resolving the Company's Y2K issues is not expected to exceed $110,000, of which approximately $85,000 has been spent through March 28, 1999. This includes the cost of testing the Company's products for Y2K compliance and costs relating to internal processing systems or vendor-provided systems that may be incurred in making such systems Y2K compliant. Estimates of Y2K costs are based on numerous assumptions, and there can be no assurance that the estimates are correct or that actual costs will not be materially greater than anticipated. Contingency Planning and Risks The Company has begun developing contingency plans for Y2K non-compliance. These plans include identifying alternate suppliers, vendors, procedures, conducting staff training and developing communication plans. Any significant incremental costs associated with these plans will not become known until these plans are fully developed. The Company's standing Y2K Committee has been assigned the task of developing and coordinating the Y2K non-compliance contingency plan. The Company's goal is to complete its Y2K non-compliance contingency plan by September 30, 1999. Based on its assessments to date, the Company does not believe that it will experience any material disruption of its internal information processing, interfacing with customers or processing of orders and billing due to Y2K non-compliance. However, if certain critical third-party providers, such as those providers supplying electricity, water or telephone service, experience difficulties resulting in disruption of service to the Company, a shutdown of certain of the Company's operations at individual facilities could occur for the duration of the disruption. The Company believes that the greatest Y2K exposure exists in infrastructure areas such as telecommunications (both voice and data) and electricity and other utilities. The Company is working closely with the property owners of the Company's leased facilities to assess the possibility of providing backup systems to provide power in the event of an electrical infrastructure failure and with its major telecommunications vendors to provide alternate or redundant telecommunications availability in the event of a telecommunications infrastructure failure. A temporary slowdown or cessation of operations at one or more of the Company's facilities could result in delays in meeting customers' orders, the timing of billings to and receipt of payment from customers and could result in complaints, charges or claims. The Y2K non-compliance of customers could potentially delay the receipt of orders for the Company's products and also the timing of payments for products already delivered. The Company believes that its Y2K program, including related contingency planning, should significantly lessen the possibility of significant interruptions of normal operations. While costs related to the Y2K non-compliance of third parties, business interruptions, litigation and other liabilities related to Y2K issues could materially and adversely affect the Company's business, results of operations and financial condition, the Company believes its Y2K compliance effort will enable the Company to manage its Y2K transition without any material effect on its business, financial condition or results of operations. The most reasonably likely worst-case scenario of failure by the Company or its suppliers or customers to resolve Y2K issues could potentially be a temporary slowdown or cessation of operations at one or more of the Company's facilities and/or a temporary inability on the part of the Company to process orders in a timely manner and to deliver finished products to customers. Delays in meeting customers' orders could potentially affect the timing of billings to and payments received from customers and could result in complaints, charges or claims. Customers' Y2K issues could potentially also delay the receipt of orders for the Company's products and also the timing of payments to the Company for products already delivered. Safe Harbor for Forward-Looking Statements Statements in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" or made by management of the Company which contain more than historical information may considered forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995) which are subject to risks and uncertainties. These statements often contain words like believe, expect, anticipate, intend, contemplate, seek, plan, estimate or similar expressions. Forward-looking statements do not guarantee future performance. Forward-looking statements represent the Company's expectations or beliefs concerning future events, including the following: any statements regarding future sales and other results of operations; any statements regarding the continuation of historical trends; any statements regarding the sufficiency of the Company's cash balances and cash generated from operating and financing activities for the Company's future liquidity and capital resources; and any statements regarding the future of the software industry, the segment of the software industry within which the Company operates, or the Company's business. Actual results may differ materially from those expressed in the forward-looking statements because of important factors identified in this section and those set forth on Exhibit 99.1 to the Company's annual report on Form 10-K for the fiscal year ended March 29, 1998. 8 Carleton Corporation CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in thousands, except per share)
For the Fiscal Years Ended --------------------------------------------------------- March 28,1999 March 29,1998 March 30, 1997 --------------------------------------------------------- (restated) REVENUES License $ 1,755 $ 922 $ 1,792 Professsional services 2,518 1,466 797 Other services 1,286 660 205 --------------------------------------------------------- Total 5,559 3,048 2,794 COSTS OF REVENUES License 382 515 416 Professional services 2,726 1,644 687 Other services 162 43 117 --------------------------------------------------------- Total 3,270 2,202 1,220 --------------------------------------------------------- Gross Profit 2,289 846 1,574 OPERATING EXPENSES Research, development and engineering 3,369 2,519 766 Selling, general and administrative 5,639 5,100 4,545 Other charges 2,637 3,580 382 --------------------------------------------------------- Total Operating Expenses 11,645 11,199 5,693 --------------------------------------------------------- (Loss) from Operations (9,356) (10,353) (4,119) OTHER INCOME (EXPENSE) Interest expense (73) (78) (83) Investment income 390 566 365 --------------------------------------------------------- Total 317 488 282 --------------------------------------------------------- (Loss) from Continuing Operations Before Income Taxes (9,039) (9,865) (3,837) Income tax expense -- (10) (20) --------------------------------------------------------- (Loss) from Continuing Operations (9,039) (9,875) (3,857) Discontinued Operations Income (Loss) from operations of discontinued Internet Solutions Division (net of taxes of $0 , $55 and $180) -- 606 (10,621) Gain on disposal of Internet Solutions Division 185 4,264 -- --------------------------------------------------------- 185 4,870 (10,621) --------------------------------------------------------- Net (Loss) ($8,854) ($5,005) ($14,478) ========================================================= (Loss) Per Common Share-Basic and Diluted Continuing Operations ($2.71) ($3.25) ($1.40) Discontinued Operations .06 1.60 ( 3.75) --------------------------------------------------------- Total ($2.65) ($1.65) ($5.15) =========================================================
See Accompanying Notes to Consolidated Financial Statements 9 CARLETON CORPORATION CONSOLIDATED BALANCE SHEETS (Dollars in thousands) March 28, March 29, 1999 1998 --------------------- (restated) ASSETS Current Assets Cash and cash equivalents $ 3,168 $ 11,111 Cash in escrow 65 730 Accounts receivable, less allowance for doubtful accounts of $50 in 1999 and $185 in 1998 2,016 1,517 Other 296 76 -------------------- Total current assets 5,545 13,434 Property and Equipment Property and equipment 2,666 4,649 Less accumulated depreciation (1,845) (3,256) -------------------- Net property and equipment 821 1,393 Other Assets Intangible assets - net of accumulated amortization of $3,743 in 1999 and $1,101 in 1998 4,184 6,827 Capitalized software 231 -- -------------------- Total other asssets 4,415 6,827 -------------------- TOTAL ASSETS $ 10,781 $ 21,654 ==================== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Accounts payable $ 183 $ 319 Accrued expenses 1,421 3,067 Deferred revenue 962 809 Note payable 1,000 1,000 -------------------- Total current liabilities 3,566 5,195 Long-term Notes Payable 174 602 Shareholders' Equity Common stock - authorized 6,000,000 shares at $.25 par value; issued and outstanding at March 28, 1999 - 3,345,918 shares, March 29, 1998 - 3,305,363 shares 836 826 Additional paid-in capital 62,779 62,751 Retained deficit (56,574) (47,720) -------------------- Total shareholders' equity 7,041 15,857 -------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 10,781 $ 21,654 ==================== See Accompanying Notes to Consolidated Financial Statements 10 Carleton Corporation CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands)
For the Fiscal Years Ended --------------------------------------------------------- March 28,1999 March 29,1998 March 30, 1997 --------------------------------------------------------- (restated) OPERATING ACTIVITIES Net loss ($8,854) ($5,005) ($14,478) Adjustments to reconcile net loss to net cash (used in) operating activities net of acquisition of company: Depreciation 409 935 1,619 Amortization 2,643 1,722 2,521 Compensation earned on restricted stock -- 52 67 Write-off of assets due to impairment -- 858 6,292 (Gain) Loss on sale of property and equipment (2) -- 301 Gain on sale of product line -- -- (5,783) Gain on disposal of Internet Solutions Division (185) (4,264) -- Non-current portion of other charges -- 1,621 -- Accounts receivable (499) 1,704 4,229 Installment receivables -- 170 1,369 Inventories -- (52) 2,890 Other assets (220) 163 851 Accounts payable, accrued expenses and deferred revenue (1,211) (8,704) (255) --------------------------------------------------------- Net cash (used in) operating activities (7,919) (10,800) (377) INVESTING ACTIVITIES Cash received from sale of product line -- 10,712 7,400 Acquisition of business (net of cash acquired) -- 68 -- Sales and maturities of marketable securities -- -- 4,318 Payments received on note receivable -- -- 8,700 Purchases of property and equipment (94) (154) (1,029) Capitalized software (231) -- (2,704) Change in cash held in escrow 664 (15) 736 --------------------------------------------------------- Net cash provided by investing activities 339 10,611 17,421 FINANCING ACTIVITIES Repayment of debt (428) (2,750) (8,976) Other stock transactions including option exercises 65 185 342 --------------------------------------------------------- Net cash used in financing activities (363) (2,565) (8,634) --------------------------------------------------------- Net increase (decrease) in cash and equivalents (7,943) (2,754) 8,410 Beginning cash and equivalents 11,111 13,865 5,455 --------------------------------------------------------- Ending cash and equivalents $ 3,168 $11,111 $13,865 ========================================================= Supplemental disclosures of cash flow information: Cash paid for interest $ 76 $74 $74 Cash paid for income taxes 18 141 94 Non-cash issuance of common stock and debt for acquisition of business -- 6,344 --
See Accompanying Notes to Consolidated Financial Statements 11 Carleton Corporation CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (Dollars in thousands)
Common Stock ----------------------- Number Additional Accumulated Unearned of Shares Amount Paid-in Capital Deficit Compensation -------------------------------------------------------------------------- Balance March 31, 1996 2,805,691 $701 $57,062 ($28,237) ($197) Options exercised/Employee Stock Purchase 27,194 7 335 -- -- Net change in restricted stock (1,160) -- (24) -- 24 Compensation earned -- -- -- -- 67 Net loss -- -- -- (14,478) -- -------------------------------------------------------------------------- Balance March 30, 1997 2,831,725 708 57,373 (42,715) (106) Options exercised/Employee Stock Purchase 43,010 10 175 -- -- Acquisition of Carleton Corp. 432,238 108 5,257 -- -- Net change in restricted stock (1,610) -- (54) -- 54 Compensation earned -- -- -- -- 52 Net loss -- -- -- (5,005) -- -------------------------------------------------------------------------- Balance March 29, 1998 3,305,363 826 62,751 (47,720) -- Options exercised/Employee Stock Purchase 40,555 10 28 -- -- Net Loss -- -- -- (8,854) -- -------------------------------------------------------------------------- Balance March 28, 1999 3,345,918 $836 $62,779 ($56,574) $-- ==========================================================================
See Accompanying Notes to Consolidated Financial Statements 12 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 28, 1999 (Dollars in thousands, except per share amounts) 1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Consolidation The consolidated financial statements include the accounts of Carleton Corporation and its wholly owned subsidiaries (together "the Company"). All inter-company accounts and transactions have been eliminated in consolidation. The net assets and the operations of the two subsidiaries, Systems Strategies, Inc. and BlueLine Software Inc., were acquired by Computer Network Technology Corporation in its acquisition of the Company's Internet Solutions Division in October 1997 (see Note 3) while the Company continues to own the legal entities. The Company is in the process of liquidating these subsidiaries. Description of Business The Company operates in one segment which develops and markets software products that provide data integration solutions for business critical applications such as customer relationship management systems, data warehousing and application conversions. The Company distributes its technology and professional services through direct sales and channel partners primarily in North America. In fiscal 1999, sales to one customer accounted for 22% of total revenues and sales to a second customer accounted for 11% of total revenues. In fiscal 1998, one customer accounted for 20% of total revenues and a second customer accounted for 14% of total revenues. In fiscal 1997, one customer accounted for 15% of total revenues, a second customer accounted for 13%, a third customer accounted for 11%, and a fourth customer accounted for 10% of total revenues. The customer that accounted for 20% of total revenues in fiscal 1998 is the same customer that accounted for 13% of total revenues in fiscal 1997. Fiscal Year The Company's fiscal year ends on the Sunday nearest March 31. Fiscal 1999, fiscal 1998 and fiscal 1997 were all 52-week years. Revenue Recognition License revenues are recorded when the persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectibility is probable in accordance with AICPA Statement of Position 97-2. Professional services revenues are recorded when the services are provided. Maintenance revenues are recognized over the time period covered by the related contract. Cash Equivalents Securities that are readily convertible to cash with original maturities of three months or less when purchased are considered cash equivalents. The cost of the cash equivalents approximates market value. Cash and cash equivalents consist of: March 28, 1999 March 29, 1998 ----------------------------------- Cash $ 186 $ 306 Money market funds 1,867 9,705 US Treasury bills & Bank CD's 1,115 1,100 ----------------------------------- Total cash and cash equivalents $ 3,168 $ 11,111 =================================== Property and Equipment Property and equipment are recorded at cost and depreciated on a straight-line basis over the assets' estimated useful lives. Leasehold improvements are depreciated over the lesser of the lease life or the estimated life of the related improvement. Property and equipment consist of: Depreciable March 28, 1999 March 29, 1998 Lives in Years ---------------------------------------------- Machinery and equipment $ 2,078 $ 3,255 3 - 6 Furniture and fixtures 588 1,112 4 - 10 Leasehold improvements -- 282 4 - 5 -------------------------- Total property and equipment $ 2,666 $ 4,649 ========================== 13 Capitalized Software The Company, in accordance with Statement of Financial Accounting Standard No. 86, capitalizes software development costs by project. These capitalized costs are amortized on a straight-line basis over a period of three years or the expected life of the product, whichever is less. Research and development costs are charged to expense as incurred. Impairment of Long-Lived Assets The Company records impairment losses on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. The amount of impairment loss recorded is the amount by which the carrying value of the assets exceeds the fair value of the assets. Income Taxes Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases. Income (Loss) per Share The numerators used in the computation of the basic and diluted income (loss) per share shown on the consolidated statements of operations are the applicable amounts shown as income (loss) from continuing operations and discontinued operations. The denominators used in the calculation of the basic income (loss) per share are 3,339 for fiscal 1999, 3,036 for fiscal 1998 and 2,822 for fiscal 1997, which represent the weighted average shares outstanding for each of the years. These same amounts are used as the denominator in the calculation of the diluted income (loss) per share. Stock Split The Company completed a 1-for-5 reverse stock split during fiscal 1999. Accordingly, all share, per share, weighted average share and stock option information for periods prior to the split have been restated to reflect the split. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported on the financial statements and in the accompanying notes. Actual results could differ from such estimates. Reclassification Certain prior year items have been reclassified to conform to current year presentation. 2) GOING CONCERN The accompanying financial statements have been prepared on the basis that the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company's ability to do so will be dependent upon obtaining additional funds from external sources and generating sufficient working capital for operations. The Company has been exploring and continues to explore potential strategic relationships. In May 1999, Dougherty Summit Securities, LLC, an investment banking firm specializing in financing emerging growth companies, was retained by the Company to advise it on strategic financing alternatives. Due to uncertainties related to the ability of management to achieve its plans, no assurances can be given as to the ability of the Company to continue in existence. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amount and classification of liabilities that may result from the possible inability of the Company to continue as a going concern. 14 3) DISCONTINUED OPERATIONS The Company closed on an Asset Purchase Agreement (the Agreement) with Computer Network Technology Corporation (CNT) on October 31, 1997 for the sale of the Company's Internet Solutions Division. The terms of the Agreement provided for CNT to pay the Company $11,412 in cash and to assume certain liabilities. A portion of the cash proceeds was placed in escrow pending final resolution of the book value of the net assets acquired by CNT. The sale of the Internet Solutions Division has been accounted for as a discontinued operation and reflected as such in the consolidated financial statements. The Internet Solutions Division included the business operations of Systems Strategies, Inc. (acquired by the Company in December 1993) and BlueLine Software, Inc. (acquired by the Company in June 1995). The MQView product line sold to Candle Corporation in January 1997 had also been a part of the Internet Solutions Division. Revenues for the discontinued operations were $13,809 and $34,336 for fiscal 1998 and 1997 respectively. 4) ACQUISITION OF THE FORMER CARLETON CORPORATION The Company closed on an Agreement and Plan of Merger (the Agreement) with the former Carleton Corporation (Former) on October 31, 1997. Under the terms of the Agreement, the Company acquired all the stock of Former through (i) the cash purchase of Former shares held by shareholders owning less than 20,000 shares and (ii) the exchange of 432,238 shares of the Company's common stock (valued at $10.00 per share) and the issuance of notes with an initial face value of $2,000 for the Former shares held by shareholders owning more than 20,000 shares. The notes have a maturity date of October 31, 2001, carry an interest rate of 5.81%, and are subject to certain offsets as well as further adjustments based upon the market price performance of the Company's stock. The initial face value of the notes was reduced by $1,000 to a value of $1,000 at March 29, 1998. This reduction was based upon the provision in the notes that allowed the Company to reduce the face value of the notes based upon the Company's total revenues for the period between September 29, 1997 and March 28, 1997. Another offset related to the disagreement over ownership of certain intellectual property included within the former Carleton Corporation products. Such disagreement was resolved in a settlement agreement dated March 19, 1999 between Case Associates and Carleton Europe, N.V., and the Company. These offsets, together with other offsets and adjustments, reduced the value of the notes to $0 at March 28, 1999 and $602 at March 29, 1998. One of the noteholders is a Director of the Company whose share in the recorded value was $0 at March 28, 1999 and $28 at March 29, 1998. In addition, the Company rolled over any outstanding options and warrants for Former stock and converted them into options and warrants for the Company's common stock. The excess of the market value of the Company's common stock over the fair value of the options and warrants being rolled over, in the amount of $1,022 net of forfeitures, was recorded as an additional cost of the acquisition. The total purchase price of $10,868 consisted of the value of the common stock issued ($4,322), the value given to options and warrants net of forfeitures ($1,022), the value of the notes payable less the $1,000 adjustment for the revenue shortfall ($1,000), the liabilities assumed ($3,744), and transaction expenses and other items ($780). The total purchase price was allocated to current and fixed assets acquired ($1,340) and goodwill and other intangibles ($9,528). Pro forma consolidated results of continuing operations (excluding other charges) as if the Carleton acquisition had occurred at the beginning of the periods presented are: (Unaudited) Fiscal 1998 Fiscal 1997 ----------- ---------- Revenues $4,852 $7,075 Net loss from continuing operations (2,858) (4,169) Net loss from continuting operations per share - basic and diluted (.87) (1.30) The pro forma results are not necessarily indicative of what actually would have occurred if the acquisition had been in effect for the entire periods presented. 15 Valuation Methodology The transaction was recorded under the purchase method of accounting. Standard valuation procedures and techniques were utilized in determining the fair value of each intangible asset. The valuation was performed by an outside organization in conformity with the requirements of the Principals of Appraisal Practice Code of Ethics of the American Society of Appraisers. Intangible assets were identified through discussions regarding the Company's intentions for future use of the acquired assets, interviews with the Company's management, and analysis of data provided by the Company concerning products, technologies, markets, historical financial performance, estimates of future performance, and the assumptions underlying those estimates. The economic and competitive environment in which the Company and the former Carleton Corporation operate was also considered in the valuation analysis. Specifically, purchased research and development was identified and valued through extensive discussions with the Company's management and the Company's analysis of the data provided concerning developmental products, their respective stage of development, the time and resources needed to complete them, their expected income-generating ability, their target markets and associated risks. The Income Approach, which includes an analysis of the markets, cash flows, and risks associated with achieving such cash flows, was the primary technique utilized in valuing each purchased research and development project. A portion of the purchase price was allocated to the developmental projects based on the appraised fair values of such projects. Valuation Analysis The value of the acquired in-process technology was computed using a discounted cash flow analysis on the anticipated income stream of the related product sales. The discounted cash flow analysis was based on management's forecast of future revenues, cost of revenues, and operating expenses related to the products and technologies purchased from the former Carleton Corporation. Management's analysis also considered anticipated product development and product introduction schedules for future products, product sales cycles, and the estimated life of a product's underlying technology. The purchase consideration allocated to the intangible assets based on fair values is as follows (in thousands): In-process research and development $1,600 Developed technology 1,800 Assembled work force 700 Customer base 900 Trademark and trade name 900 Goodwill 3,628 ------ Total purchase consideration $9,528 ====== Developed technology and goodwill acquired are being amortized on a straight line basis over three years. The purchase price allocation related to the former Carleton Corporation acquisition differs from what was originally recorded. The Company allocated costs of the acquisition to the assets acquired and liabilities assumed based on their estimated fair values using valuation methods believed to be appropriate at the time. The Company expensed in-process research and development (IPR&D) ($9.5 million) related to the acquisition in accordance with FASB Interpretation No. 4, "Applicability of FASB Statement No. 2 to Business Combinations Accounted for by the Purchase Method." Subsequent to the Securities and Exchange Commission's letter to the AICPA dated September 9, 1998 regarding its views on IPR&D, the Company has re-evaluated its IPR&D charges on the acquisition of the former Carleton Corporation. Consequently, the Company has revised the purchase price allocations and restated the fiscal 1998 annual financial statements and the financial statements for the first three quarters of fiscal 1999. The Company has decreased the amount previously expensed as IPR&D and increased the amount capitalized as developed technology and goodwill by $7.9 million. The effect of the restatement related to acquired in-process technology in the following table presents the impact on the Company's results of operations for the fiscal year ended March 29, 1998 and its financial position at March 29, 1998 (in thousands). The adjustment results from the decrease in the value assigned to acquired in-process technology and the increased amortization of goodwill. 16
Year Ended March 29, 1998 Results of Operations: Loss from Continuing Operations ($16,674) Adjustment related to acquired in-process technology 6,799 ----------- Restated ($9,875) =========== Net loss as previously reported ($11,804) Adjustment related to acquired in-process technology 6,799 ----------- Restated net loss ($5,005) =========== Loss per share as previously reported ($3.90) Adjustment related to acquired in-process technology 2.25 ----------- Restated loss per share ($1.65) =========== Financial Position March 29, 1998 Intangible assets previously reported - Adjustment related to acquired in-process technology and valuation of stock options 6,827 ----------- Restated $6,827 =========== Retained deficit, as previously reported ($54,519) Adjustment related to acquired in-process technology 6,799 ----------- Restated ($47,720) ===========
5) CAPITALIZED SOFTWARE A summary of the Company's transactions involving capitalized software is shown below. In fiscal 1998 and 1997, capitalized software costs related to certain products were deemed to be impaired and the unamortized balances were written off and included in other charges in the Consolidated Statements of Operations. The write off in fiscal 1997 included $4,750 that was related to the Internet Solutions Division. Fiscal 1999 Fiscal 1998 ----------- ----------- Balance beginning of year $ -- $1,373 Software costs capitalized 231 -- Written off -- (858) Amortized -- (515) ----------- ----------- Balance end of year $231 $ -- =========== =========== 6) NOTES PAYABLE In addition to the notes payable to the former Carleton shareholders (see Note 4), the Company has a $1,000 note payable to a bank under the terms of a Credit Agreement. The Credit Agreement's maturity date is October 31, 1999, and the borrowings are secured by a first priority, perfected security interest in the Company's cash and cash equivalents. The balance carries an interest rate equal to the LIBOR plus 1.75% (7.0625% at March 28, 1999). As discussed in Note 4, the Company resolved a disagreement over certain intellectual property rights with Case Associates and Carleton Europe, N.V. The agreement called for a $300,000 payment by the Company on the date of the agreement and $200,000 payable on March 16, 2001. Per terms of the settlement, this note is non-interest bearing. Accordingly, the present value of the note has been recorded assuming the Company's current cost of money as the discount factor. Note Payable to: March 28, 1999 March 29, 1998 -------------- -------------- Current: Bank 1,000 1,000 Long-term: Case Associates and Carleton Europe N.V. 174 -- Former Carleton shareholders -- 602 17 7) INCOME TAXES The Company has operating loss carryforwards at March 28, 1999 of approximately $66,138 that are available to offset taxable income through 2013. The carryforwards begin to expire in 2001. A valuation allowance has been recorded to offset net deferred tax assets, resulting primarily from operating loss carryforwards that may not be realized. The Company has incurred some foreign and state tax expense in fiscal years 1999, 1998 and 1997. The state tax provisions of $0, $30 and $50 for fiscal years 1999, 1998 and 1997, respectively, have been allocated between continuing and discontinued operations. The foreign tax provisions of $0, $35 and $150 for fiscal years 1999, 1998 and 1997, respectively, have been entirely recorded against discontinued operations. The components of deferred tax assets and liabilities are as noted:
March 28,1999 March 29, 1998 ------------- -------------- Deferred tax assets Net operating loss carryforwards $ 29,802 $ 26,276 Research and development credit 1,081 1,081 Allowance for doubtful accounts 20 74 AMT carryforward 127 127 Other 217 362 ------------- -------------- 31,248 27,921 Deferred tax liabilities Capitalized software (92) -- Depreciation and amortization (4) (60) ------------- -------------- (96) (60) ------------- -------------- Net deferred tax assets 31,152 27,861 ------------- -------------- Valuation allowance (31,152) (27,861) ------------- -------------- Total net deferred tax assets $ -- $ -- ============= ==============
8) STOCK OPTIONS, WARRANTS AND RESTRICTED STOCK The Company has authorized the grant of up to 640,000 options under the Company's stock option plan. These options may be granted to certain officers, directors and employees to purchase the Company's common stock at prices equal to the fair market value of the stock at the date of grant. A majority of the options granted have ten-year terms and vest over a period of two to four years. The Company follows Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related interpretations in accounting for its employee stock options. Under APB 25, when the exercise price of employee stock options equals the market price of the underlying stock on the date of the grant, no compensation expense is recognized. During fiscal 1998, the Company repriced all outstanding employee options as of April 3, 1997 to an exercise price of $6.25 per share. During fiscal 1999, the Company cancelled the majority of stock options outstanding and reissued new options as of December 7, 1998. Vesting terms for these new options range from two to four years depending on the time elapsed from the grant date of the underlying cancelled options. Exerciseable options at March 28, 1999, other than those rolled over in conjunction with the Carleton acquisition, include options held by terminated employees and current or former directors. These options total 96,700 and have exercise prices ranging from $6.25 to $60.00. The acquisition of the former Carleton Corporation resulted in the Company rolling over certain options and warrants to buy former Carleton stock into options and warrants to buy the Company's stock. These former Carleton options and warrants converted into 100,126 options and 27,029 warrants for the Company's stock. The warrants include warrants on 18,428 shares at $.13 per share and 8,601 shares at $34.88 per share and are exerciseable through May 2002. These options and warrants are fully vested. A summary of stock options is: 18
Weighted Weighted Average Average Rollover Shares Exercise Rollover Exercise Available Options Price Per Options Price Per For Grant Outstanding Share Outstanding Share --------------------------------------- ----------------------- Balance March 31, 1996 245,833 260,670 $18.20 Granted (104,740) 104,740 15.55 Exercised -- (10,500) 13.00 Canceled 70,420 (70,420) 20.45 --------------------------------------- Balance March 30, 1997 211,513 284,490 15.30 Granted (239,360) 239,360 6.20 Rollover -- -- -- 100,126 $.90 Exercised -- (15,000) 6.75 (16,332) 1.00 Canceled 144,475 (144,475) 8.50 (6,511) 2.35 --------------------------------------- ----------------------- Balance March 29, 1998 116,628 364,375 8.75 77,283 1.15 Granted (397,850) 397,850 1.73 -- -- Exercised - - - (33,200) 1.18 Canceled 431,075 (431,075) 6.48 (3,184) 1.85 --------------------------------------- ----------------------- Balance March 28, 1999 149,853 331,150 $2.82 40,899 $1.03 ======================================= =======================
The rollover options from the Carleton acquisition are fully vested and are currently exercisable. The rollover options outstanding at March 28, 1999 include 19,617 options at an exercise price of $.10 per share, 6,896 options at an exercise price of $.95 per share and 14,386 options at an exercise price of $2.35 per share. At March 28, 1999 and March 29, 1998, all of the outstanding rollover options were exercisable. The 331,150 options outstanding at March 28, 1999 include 275,450 options with exercise prices between $1.19 per share and $2.63 per share; 45,000 options with exercise prices between $6.25 per share and $8.13 per share; 9,500 options with exercise prices between $15.63 per share and $17.81 per share; and 1,200 options with an exercise price of $60.00 per share. At March 28, 1999 the outstanding options had a weighted average contractual life of 8.47 years. At March 28, 1999, March 29, 1998 and March 30, 1997, there were 96,700, 179,112 and 215,995, respectively, options exercisable at weighted average exercise prices of $6.46, $13.23 and $14.79. Pro forma information regarding net loss and related per share data is required by Statement of Financial Accounting Standards No. 123, and has been determined as if the Company had accounted for its employee stock options, other than those rolled over with the Carleton acquisition, under the fair value method of the statement. The fair value for these options was estimated at the date of the grant using a Black-Scholes option pricing model with the following weighted average assumptions for fiscal 1999, fiscal 1998 and fiscal 1997: risk-free interest rate ranging from 3.63% to 6.72%; dividend yield of 0%; volatility factors of the expected market price of the Company's common stock of .869, .747 and .722, respectively; and a weighted average expected life of the options of 6 years. The weighted average fair value of options granted during fiscal 1999, 1998 and 1997 was $1.29, $5.50 and $10.55, respectively. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information is: Fiscal 1999 Fiscal 1998 Fiscal 1997 --------------------------------------- Net loss ($9,190) ($5,465) ($14,698) Net loss per share - basic and diluted (2.75) (1.80) (5.20) 19 Note: The pro forma effect on net loss for the fiscal years is not representative of the pro forma effect in future years because it does not take into consideration pro forma compensation expense related to grants made prior to fiscal 1996. The Company has authorized the issuance of up to 60,000 shares of restricted stock and entered into restricted stock agreements with various employees. The agreements call for issuance of the Company's common stock to these employees and provide vesting generally over a five-year period. There was no activity related to restricted stock during fiscal 1999. At March 28, 1999 36,463 shares of restricted stock had been issued to employees. The value of the stock at the time of grant was deferred and amortized over the term of the agreements. Compensation expense of $0, $52 and $67 was recognized in fiscal 1999, 1998 and 1997, respectively, related to these agreements. A total of 23,537 additional shares of restricted stock can be issued by the Company. 9) OTHER CHARGES Other charges for fiscal 1999 include the amortization of developed technology and goodwill acquired in connection with the acquisition of the former Carleton Corporation (see Note 4). Other charges for fiscal 1998 include the amount expensed as IPR&D, the amortization of developed technology and goodwill acquired in connection with the acquisition of the former Carleton Corporation (see Note 4) and the write off of capitalized software (see Note 5). Other charges for fiscal 1997 include the write off of capitalized software (see Note 5). Additional items previously included in other charges for fiscal 1997 totaling $10,274 have been included in discontinued operations. These charges were for rent on un-subleased facilities, costs in moving and closing facilities, write-off of property and equipment relating to those facilities, write-off of goodwill and capitalized software and other expenses. 10) COMMITMENTS AND CONTINGENCIES The Company has operating leases on its headquarters and operations location in Minnesota through August 2003 and its operations location in Massachusetts through September 2001. Under these leases, the Company is responsible for base rent plus any operating cost escalation. The Company is also a party to several operating leases for which the Company has either assigned its interest to another party or has arrangements with subtenants. These leases provide for a base rent and a sharing in the operating costs. Future minimum lease payments, net of any subleases or assignments, as of March 28, 1999 are: Future Minimum Fiscal Year Lease Payments ----------- -------------- 2000 $379 2001 407 2002 321 2003 227 2004 94 Net rent expense charged to continuing operations for property and equipment under operating leases for fiscal 1999, 1998 and 1997 was approximately $360, $305 and $212, respectively. The Company is involved in various claims and proceedings that, in the opinion of management and counsel, do not involve amounts material to the financial position of the Company. 11) EMPLOYEE BENEFIT PLANS The Company maintains a 401(k) Savings and Investment Plan for its eligible employees. Employees scheduled to work 1,000 hours in the first year may become participants in the before-tax contributions feature of the Plan as of the enrollment date after their date of hire. Employees may become participants in the matching contribution feature of the Plan as of the first payroll period following six months of service. Employees' contributions can range from 1% to 15% of their compensation. The Company currently matches 25% of the first 4% of employees' contributions. Company contributions totaled $45, $67 and $118 toward 401(k) employer contributions in fiscal years 1999, 1998 and 1997, respectively. 20 REPORT OF INDEPENDENT AUDITORS THE BOARD OF DIRECTORS AND SHAREHOLDERS OF CARLETON CORPORATION We have audited the accompanying consolidated balance sheets of Carleton Corporation as of March 28, 1999 and March 29, 1998 and the related consolidated statements of operations, shareholders' equity and cash flows for the years ended March 28, 1999, March 29, 1998 and March 30, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Carleton Corporation at March 28, 1999 and March 29, 1998, and the consolidated results of its operations and its cash flows for the years ended March 28, 1999, March 29, 1998 and March 30, 1997 in conformity with generally accepted accounting principles. As discussed more fully in Note 4 to the financial statements, the Company has revised the amount allocated to acquired in-process research and development in connection with its 1997 acquisition of the former Carleton Corporation and has restated its 1998 consolidated financial statements accordingly. As discussed in Note 2 to the financial statements, certain conditions raise substantial doubt concerning the Company's ability to continue as a going concern. The accompanying financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going concern. Ernst & Young LLP Minneapolis, Minnesota June 1, 1999 COMPANY REPORT ON FINANCIAL STATEMENTS TO THE SHAREHOLDERS OF CARLETON CORPORATION: The management of Carleton Corporation has prepared, and is responsible for, all information and representations contained in the financial statements and other sections of this Annual Report. The Company's financial statements have been prepared in conformity with generally accepted accounting principles. Carleton maintains a system of internal accounting controls designed to provide reasonable assurance that transactions are executed in accordance with the proper authorization, that all such transactions are properly recorded and summarized to produce reliable financial records and reports, that assets are safeguarded, and that the accountability for assets is maintained. The Company maintains high standards when selecting, training, and developing personnel, to insure that management's objectives of maintaining strong, effective internal controls and unbiased, uniform reporting standards are attained. Ernst & Young LLP, independent auditors, have audited the Company's financial statements in accordance with generally accepted auditing standards and their report is included herein. The Audit Committee of the Board of Directors, which is composed solely of directors who are not officers or employees, meets regularly and on special occasions, as needed, with corporate financial management and the independent auditors to review their activities. The independent auditors have access to the Audit Committee without management being present to discuss the results of their work, adequacy of internal financial controls and the quality of financial reporting. Minneapolis, Minnesota June 1, 1999 21 SELECTED HISTORICAL FINANCIAL DATA For the Year Ended March 28, 1999 (Dollars in thousands, except per share amounts)
For the Fiscal Years Ended -------------------------- 1999 1998 1997 1996 1995 ---------------------------------------------------- (restated) STATEMENTS OF OPERATIONS Revenues $ 5,559 $ 3,048 $ 2,794 $ 6,332 $ 8,298 Net income (loss) from continuing operations (9,039) (9,875) (3,857) 662 2,780 Net income (loss) per share from continuing operations * (2.71) (3.25) (1.40) .25 1.05 Net income (loss) (8,854) (5,005) (14,478) (7,490) 9,839 Net income (loss) per share * (2.65) (1.65) (5.15) (2 .70) 3.70 BALANCE SHEET DATA Total assets 10,781 21,654 31,877 54,689 55,326 Long-term debt/notes payable 174 602 -- -- 8,976 Shareholders' equity 7,041 15,857 15,260 29,329 32,967
SELECTED QUARTERLY FINANCIAL DATA (Dollars in thousands, except per share amounts) (Unaudited) The Company believes that all neccessary adjustments have been included to present fairly the selected quarterly information.
First Second Third Fourth Fiscal Quarter Quarter Quarter Quarter Year ------------------------------------------------------- STATEMENTS OF OPERATIONS Fiscal 1999 Revenues $ 1,322 $ 1,012 $ 1,401 $ 1,824 $ 5,559 Gross Profit 539 262 616 873 2,289 Net loss from continuing operations (2,298) (2,656) (2,149) (1,936) (9,039) Net loss (2,298) (2,656) (1,964) (1,936) (8,854) Net loss per share*: Continuing operations (.69) (.79) (.64) (.58) (2.71) Net loss (.69) (.79) (.59) (.58) (2.65) Fiscal 1998 Revenues $ 279 $ 536 $ 770 $ 1,463 $ 3,048 Gross Profit (loss) (160) 118 118 770 846 Net loss from continuing operations (1,452) (1,282) (4,795) (2,346) (9,875) Net loss (527) (979) (1,255) (2,244) (5,005) Net loss per share*: Continuing operations (.50) (.45) (1.52) (.71) (3.25) Net loss (.20) (.35) (.40) (.68) (1.65)
Note: The third and fourth quarters of fiscal 1998 and the first three quarters of fiscal 1999 have been restated to reflect the adjustment to the purchase price allocation associated with the acquisition of the former Carleton Corporation in October 1997. *Per share calculations are the same for basic and diluted in 1999 and 1998. 22 DIVIDEND POLICY AND PRICE RANGE OF COMMON STOCK The Company has not declared any cash dividends on its common stock, and the Board of Directors intends to retain all earnings for use in its business for the forseeable future. At March 28, 1999 the Company had 1,251 shareholders of record. The Company's common stock is traded on the Nasdaq National Market under the symbol CARL. The following table sets forth the high and low, end-of-the-day prices for the common stock as reported by the Nasdaq National Market for the period indicated. High Low ------------------------- Fiscal 1999 First Quarter $ 6 23/32 $4 11/16 Second Quarter 6 1/4 1 1/16 Third Quarter 2 11/16 1 1/32 Fourth Quarter 2 3/16 1 1/8 Fiscal 1998 First Quarter 9 3/8 5 15/16 Second Quarter 13 3/4 6 7/8 Third Quarter 12 1/2 6 3/32 Fourth Quarter 8 3/4 5 5/8 A copy of the Company's annual report on Form 10-K (excluding exhibits) filed with the Securities and Exchange Commission may be obtained without charge to shareholders upon written request to: Investor Relations Carleton Corporation 10729 Bren Road East Minnetonka, MN 55343 23 CARLETON CORPORATION 10729 Bren Road East Minnetonka, MN 55343 www.carleton.com 1.612.238.4000 EX-21 3 SUBSIDIARIES OF THE REGISTRANT Exhibit 21 ----------
State or County of Percentage of Voting Securities Incorporation or Directly or Indirectly Owned Organization by the Company Subsidiaries: BlueLine Software, Inc. Minnesota 100% Apertus Technologies Canada Inc. Canada 100% Systems Strategies, Inc. New York 100% Systems Strategies Limited United Kingdom 100%
EX-23 4 CONSENT OF ERNST & YOUNG LLP Exhibit 23 ---------- Consent of Independent Auditors We consent to the incorporation by reference in this Annual Report (Form 10-K) of Carleton Corporation of our report dated June 1, 1999, included in the 1999 Annual Report to Shareholders of Carleton Corporation. Our audits also included the financial statement schedule of Carleton Corporation listed in Item 14(a). This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. We also consent to the incorporation by reference in the Registration Statement (Form S-8, No. 2-91060) pertaining to the Lee Data Corporation Savings and Investment Plan, in the Registration Statement (Form S-8, No. 33-38924) pertaining to the Apertus Technologies Incorporated Long Term Investment Plan, in the Registration Statement (Form S-8, No. 33-50648) pertaining to the Apertus Technologies Incorporated Stock Acquisition Loan Assistance Program, in the Registration Statement (Form S-8, No. 33-77176) pertaining to the Apertus Technologies Incorporated 1993 Stock Acquisition Loan Assistance Program, in the Registration Statement (Form S-8, No. 33-88884) pertaining to the amendments to the Apertus Technologies Incorporated 1990 Long-Term Incentive Plan, and in the Registration Statement (Form S-8, No. 333-39169) pertaining to options under the Carleton Corporation 1994 Stock Option Plan of our report dated June 1, 1999, with respect to the consolidated financial statements incorporated herein by reference, and our report included in the preceding paragraph with respect to the financial statement schedule included in this Annual Report (Form 10-K) of Carleton Corporation. /s/ Ernst & Young LLP Minneapolis, Minnesota July 9, 1999 EX-24 5 POWER OF ATTORNEY Exhibit 24 ---------- Power of Attorney KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Robert D. Gordon, their true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution for them and in their name, place and stead, in any and all capacities, to sign the Annual Report on Form 10-K of Carleton Corporation for the fiscal year ended March 28, 1999 and all amendments to such Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent, full power and authority to do and perform each and every act and thing requisite or necessary to be done in and about the premises, as fully to all intents and purposes as they might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or their substitutes, may lawfully do or cause to be done by virtue hereof. Signature Date --------- ---- /s/ Robert D. Gordon - ------------------------------------------------ July 13, 1999 Robert D. Gordon, Chairman of the Board, Chief Executive Officer, Chief Financial Officer President and Director /s/ Nicholas J. Covatta - ------------------------------------------------ July 13, 1999 Nicholas J. Covatta Jr., Director /s/ Michael Dexter-Smith July 13, 1999 - ------------------------------------------------ Michael Dexter-Smith, Director /s/ Robert W. Fischer July 13, 1999 - ------------------------------------------------ Robert W. Fischer, Director /s/ George E. Hubman July 13, 1999 - ------------------------------------------------ George E. Hubman, Director /s/ Arch J. McGill July 13, 1999 - ------------------------------------------------ Arch J. McGill, Director EX-27 6 FINANCIAL DATA SCHEDULE
5 1,000 12-MOS MAR-28-1999 MAR-30-1998 MAR-28-1999 3,233 0 2,201 50 0 5,545 2,666 1,845 10,781 3,566 174 0 0 836 6,205 10,781 1,755 5,559 3,270 3,270 11,645 0 73 (9,039) 0 (9,039) 185 0 0 (8,854) (2.65) (2.65)
EX-99.1 7 CAUTIONARY STATEMENT Exhibit 99.1 ------------ CAUTIONARY STATEMENT Carleton Corporation ("Carleton" or the "Company"), or persons acting on behalf of the Company, or outside reviewers retained by the Company making statements on behalf of the Company, or underwriters, from time to time, may make, in writing or orally, "forward-looking statements" as defined under the Private Securities Litigation Reform Act of 1995 (the "Act"). This Cautionary Statement is for the purpose of qualifying for the "safe harbor" provisions of the Act and is intended to be a readily available written document that contains factors which could cause results to differ materially from those projected in such forward-looking statements. These factors are in addition to any other cautionary statements, written or oral, which may be made or referred to in connection with any such forward-looking statement. The following matters, among others, may have a material adverse effect on the business, financial condition, liquidity, results of operations or prospects, financial or otherwise, of the Company. Reference to this Cautionary Statement in the context of a forward-looking statement shall be deemed to be a statement that any one or more of the following factors may cause actual results to differ materially from those which might be projected, forecast, estimated or budgeted by the Company in such forward-looking statement or statements: DEPENDENCE ON PRINCIPAL PRODUCTS Substantially all of the Company's revenues are derived from the sale of data integration tools, primarily the Pure Extract and PureIntegrate product lines, and related support services. Accordingly, any event that adversely affects fees derived from the sale of such tools, such as competition from other products, significant flaws in the Company's software products or incompatibility with third party hardware or software products, negative publicity or evaluation, or obsolescence of the hardware platforms or software environments in which the systems operate, could have a material adverse effect on the Company's business and operations. The Company's future financial performance will depend on the continued development and introduction of new and enhanced version of its products, and on customer acceptance of such new and enhanced products. RAPID TECHNOLOGICAL CHANGE AND NEW PRODUCTS The market for the Company's software products is characterized by rapid technological advances, evolving industry standards, changes in end-user requirements and frequent new product introductions and enhancements. The introduction of products embodying new technologies and the emergence of new industry standards could render the Company's existing products and products under development obsolete and unmarketable. Accordingly, the Company's future success will depend upon its ability to enhance its current products and develop and introduce new products that keep pace with technological developments, satisfy varying end-user requirements and achieve market acceptance. Any failure by the Company to anticipate or respond adequately to technological developments or end-user requirements, or any significant delays in product development or introduction, could damage the Company's competitive position and have a material adverse effect on revenues. There can be no assurance that the Company will be successful in developing and marketing new products or product enhancements on a timely basis or that the Company will not experience significant delays in the future, which could have a material adverse effect on the Company's business, results of operations and financial condition. In addition, there can be no assurance that new products or product enhancements developed by the Company will achieve market acceptance. Furthermore, software programs as complex as those offered by the Company may contain undetected errors or "bugs" when first introduced or as new versions are released that, despite testing by the Company, are discovered only after a product has been installed and used by customers. There can be no assurance that errors will not be found in future releases of the Company's software, or that any such errors will not impair the market acceptance of these products and adversely affect operating results. Problems encountered by customers installing and implementing new releases or with the performance of the Company's products could have a material adverse effect on the Company's business, results of operations and financial condition. DEPENDENCE ON INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS Carleton relies on a combination of copyright, trademark and trade secret laws, employee and third-party nondisclosure agreements and other industry standard methods for protecting ownership of its proprietary software. There can be no assurance, however, that, in spite of these precautions, an unauthorized third party will not copy or reverse-engineer certain portions of the Company's products or obtain and use information that the Company regards as proprietary. Although the Company's licenses contain confidentiality and nondisclosure provisions, there can be no assurance that such customers will take adequate precautions to protect the Company's source codes or other confidential information. In addition, the laws of some foreign countries do not protect the Company's proprietary rights to the same extent as do the laws of the United States. There can be no assurance that the mechanisms used by the Company to protect its software will be adequate or that the Company's competitors will not independently develop software products that are substantially equivalent or superior to the Company's software products. Furthermore, the Company may receive notices from third parties claiming that the Company's products infringe third party proprietary rights. The Company expects that, as the number of software products in the industry increases and the functionality of these products further overlaps, software products will increasingly be subject to such claims. Any such claim, with or without merit, could result in costly litigation and require the Company to enter into royalty or licensing arrangements. Such royalty or license arrangements, if required, may not be available on terms acceptable to the Company or at all. SOFTWARE ERRORS Problems with the Company's software programs may affect our sales. The Company's products contain complex software programs. The Company cannot be sure that the tests that we run on our products will reveal all errors or "bugs" that these programs may contain. Any failure to detect "bugs" in current or future versions of these programs before the Company releases them to customers would decrease our sales and adversely affect our future business prospects. The Company may also encounter unanticipated technical problems relating to the development and servicing of our products. Some of these problems may be beyond our financial and technical capacity to solve. The failure to adequately address any such problem could have a material adverse affect on the Company's business, results of operations and financial condition. PRODUCT LIABILITY The Company incurs risks of professional and other liability given the nature of the products it develops and markets. No assurance can be given that the limitations of liability set forth in the Company's license agreements and other contracts would be enforceable or would otherwise protect the Company from liability for damages to a customer resulting from a defect in one of the Company's products or arising as a result of professional services rendered by the Company. Such a claim, if successful and of sufficient magnitude, could have a material adverse effect on the Company's business, results of operations and financial condition. COMPETITION The computer software industry is intensely competitive, rapidly changing and significantly affected by new product offerings and other market activities. A number of companies offer products similar to the Company's products. Many of the Company's existing competitors, as well as a number of potential competitors, have more established and larger marketing and sales organizations, significantly greater financial and technical resources and a larger installed base of customers than the Company. The Company has no proprietary barriers to entry which would limit competitors from developing similar products or selling competing products in the Company's markets. Accordingly, there can be no assurance that such competitors will not offer or develop products that are superior to the Company's products or that achieve greater market acceptance. Competition is likely to increase, which may result in price reductions and loss of market share. The Company will also continue to face competition from potential customers who will decide to try meet their needs through the use of internal resources. There can be no assurance that the Company will be able to compete successfully against its competitors or that the competitive pressures faced by Carleton will not adversely affect its financial performance. The Company's principal markets are highly fragmented and consist of a few large multinational suppliers and a much larger number of small, regional competitors. The Company believes that its industry will experience consolidation as management information systems become more complex and as more manufacturers adopt sophisticated management information systems, forcing smaller companies in the industry to specialize or merge with their competitors. In order to compete effectively in the broad markets which the Company presently targets, the Company will need to continue to grow and attain sufficient size to ensure that it can develop new products on a timely basis in response to evolving technology and new customer demands and can sell such products on a timely basis to a variety of manufacturing industries worldwide. No assurance can be given that the Company will be able to grow sufficiently to enable it to compete effectively. In order to be successful in the future, the Company must respond effectively to customer needs and properly select and incorporate those technologies and application functionalities that will meet the challenges posed by competitors' innovations. To accomplish these critical objectives, the Companny must continue to invest in enhancing its current products and, when necessary, introduce new products to remain competitive. DEPENDENCE ON KEY EMPLOYEES The Company is dependent upon the continued services and management experience of Robert Gordon and other executive officers. If Mr. Gordon or any of such other executive officers were to leave the Company, the Company's operating results could be adversely affected. In addition, the Company's continued growth depends on its ability to attract and retain skilled employees and on the ability of its officers and key employees to manage growth successfully. The loss of certain key employees or the Company's inability to attract and retain other qualified employees could have a material adverse effect on the Company's business, results of operations and financial condition. ABILITY TO RECRUIT SALES, SERVICE AND IMPLEMENTATION PERSONNEL The ability to achieve anticipated revenues is substantially dependent on the ability of Carleton to attract on a timely basis and retain skilled personnel, especially sales, service and implementation personnel. In addition, the Company believes that its future success will depend in large part on its ability to attract and retain highly skilled technical, managerial, marketing and professional services personnel to ensure the quality of products and services provided to its customers. Competition for such personnel, in particular for product development, sales and implementation personnel, is intense, and the Company competes in the market for such personnel against numerous companies, including larger, more established companies with significantly greater financial resources than the Company. There can be no assurance that the Company will be successful in attracting and retaining skilled personnel. The Company's inability to attract and retain qualified employees could have a material adverse effect on its business and operations. DEPENDENCE ON THIRD PARTY SUPPLIERS The Company's products incorporate and use software products developed by other entities. There can be no assurance that all of these entities will remain in business, that such entities will continue to support these product lines, that their product lines will remain viable or that these products will otherwise continue to be available to the Company. If any of these entities ceases to do business or abandons or fails to enhance a particular line, the Company may need to seek other suppliers or make material changes to its own products, which could have a material adverse effect on the Company's business and operations. SIGNIFICANT OPERATING LOSSES The Company has sustained significant operating losses from continuing operations in each of its past three fiscal years. The losses were due to many factors. The most significant factors were the low sales volume generated from the continuing business as it was developing and the fixed component of the operational infrastructure. The Company's ability to return to profitability is dependent upon the continued development and successful marketing of its products. There can be no assurance, however, that the Company will be able to return to profitability. WORKING CAPITAL The Company's working capital has been declining significantly. The Company estimates that its current cash balances will not be sufficient to fund operations of the Company through the end of fiscal 2000. There can be no assurance that the Company will be able to obtain additional financing on satisfactory terms, or at all. If the Company is unable to obtain additional financing, it will be forced to cease operations and it may be forced to seek protection under bankruptcy laws. YEAR 2000 The year 2000 problem may affect the Company's information technology systems and operations. Many currently installed computer systems and software are coded to accept only two-digit entries in the date code fields. These date code fields will need to accept four-digit entries to distinguish 21st century dates from 20th century dates. This problem could result in system failures or miscalculations causing disruptions of business operations (including, among other things: a temporary inability to process transactions, send invoices or engage in similar business activities). The various software packages that we use for internal processing and to support our operations are obtained from outside vendors. These software packages are Year 200 compliant. We are also assessing Year 2000 compliance issues with companies with which we have third party outsourcing relationships, such as banks, insurance companies, payroll processors and telecommunications providers. If Year 2000 compliance is not achieved with respect to our internal systems or by our vendors, our operations could be adversely affected. The Company's products may not be Year 2000 compliant. The Company believes that the products we sell are Year 2000 compliant. The Company has developed a comprehensive Year 2000 testing program and continues to test our products using this program. The Company currently does not anticipate significant problems in achieving Year 2000 compliance. The Company has shipped Year 2000 compliant versions of all of its products to its installed customer base. All new releases of the Company's existing products and all new products will be Year 2000 compliant. Although the Company believes that its testing process is rigorous and thorough, there can be no guarantee that the Company's products will function correctly in all environments. In the event that unforeseen Year 2000 non-compliance issues arise with respect to the Company's products, the Company will endeavor to correct them. The inability of the Company to correct Year 2000 non-compliance issues with respect to its products could adversely affect our operations and could result in complaints, charges and claims against the Company. The Company could experience business disruptions as a result of Year 2000 compliance issues. Based on its assessments to date, the Company does not believe that it will experience any material disruption of its internal information processing, interfacing with customers or processing of orders and billing due to Year 2000 non-compliance. However, if certain third party providers, such as those providers of electricity, water or telephone service experience difficulties resulting in disruption of service to the Company, a shutdown of certain of the Company's operations at individual facilities could occur for the duration of the disruption. A temporary shutdown of operations at one or more of the Company's facilities and / or a temporary inability on the part of the Company to process orders in a timely fashion and deliver finished products to customers could adversely affect our operations. POTENTIAL NASDAQ DELISTING The Company could be delisted. To remain listed on the Nasdaq National Market, the Company must satisfy a number of requirements, including the following: . The Company's net tangible assets must be greater than $4,000,000. . The Company must have a public float of at least 750,000 shares with a minimum market value of $200,000. . The Company is required to have at least two market-makers in its stock. . The Company must have at least 400 holders of its stock . The Company must have a minimum bid price of $1.00 per share. If the Company is unable to meet the requirements of the Nasdaq National market, then our stock will be ineligible to be traded on the Nasdaq National Market and may only be traded on a less liquid over-the-counter market. As a result, investors in the Company's Common Stock would be less able to sell stock holdings or receive accurate stock price quotations. Consequently, the market value of the company's Common Stock could decrease. POSSIBLE VOLATILITY OF STOCK PRICE Like other technology companies, the Company's stock price may be volatile. The Company may experience volatility in our stock price due to the following and other factors: . Announcements of new product developments. . Events or disputes relating to intellectual property rights. . Fluctuations in financial performance from period to period. These and other factors may adversely affect the market price of the Company's Common Stock. ADDITIONAL BUSINESS RISKS The future success of the Company's business and operations are subject to several additional business risks, including: (i) the risk of lengthening sales cycles; (ii) higher service, administrative or general expenses occasioned by the need for additional advertising, marketing, administrative or management information systems expenditures; (iii) inability to carry out marketing and sales plans; and (iv) changes in interest rates causing a reduction of investment income. The foregoing review of factors pursuant to the Act should not be construed as exhaustive or as any admission regarding the adequacy of disclosures made by the Company prior to the effective date of the Act. -----END PRIVACY-ENHANCED MESSAGE-----